It’s time to learn once again how wealth gets created in a modern economy
It’s beginning to dawn on the world’s elites that the economies underlying our quality of life aren’t built on reinforced concrete — solid, stable, secure — but rather on loose gravel held together by gravity. China, Covid-19, chips, children and chaos in the form of natural disasters are laying bare a challenging truth: we mostly don’t know how to keep all of this — the vast richness of the West, the high standards of living, the abundant material wealth from housing and transportation to hospitals and schools — from disintegrating before our very eyes. Policymakers are finally catching up, if decades late.
America’s eccentricity is that its economy is nonpareil, even as it squanders that dynamism with some of the most comparatively mediocre institutions and infrastructure in the industrialized world. This week’s debate between former president Donald Trump and vice president Kamala Harris was a case in point: the former identifying causes of economic nervousness and the latter identifying symptoms, with neither offering a coherent plan for action (or even being asked for one).
Trump emphasized the supposed scourge of immigration and that “we’re losing our country,” a tired talking point he repeated ad infinitum. Harris brought the conversation frequently back to housing prices and kitchen-table issues, offering a motley collection of tax breaks and downpayment assistance to improve the purchasing power of the vaunted middle class.
Yet, neither candidate grappled with that vexing eccentricity: why is America so rich, and yet feels so poor?
The answer goes something like this. The economy financialized as it deindustrialized, shifting the weight of American GDP toward consumable services from productive growth. Americans are better fed, entertained, clothed and coddled than any other country in the world, and materially, there were enough factories and tradesmen and builders to keep the country trundling along.
Yet, the transition from constructing buildings to constructing Excel models since the 1970s and 1980s is finalizing, and the results are disastrous. Financialization concentrated wealth into a narrow elite fueling inequality, exacerbating tension in a country where practically everyone — even billionaires — believe they are middle-class. The decline of manufacturing led to a growing material impoverishment that has become baltant. Financial engineering and business hubris felled industrial powerhouses like General Electric, Boeing, and Intel, while a lack of urgency among policymakers to keep whole sectors of manufacturing competitively viable sealed America’s fate.
But it’s the withering of trade skills that has done the worst damage. Rapid postwar construction developed ring after ring of American suburbs echoing out of urban cores, along with the infrastructure to serve them. That housing stock has since aged as have the builders who constructed it, and regulations plus market demands have made it nearly impossible to build or rebuild at scale. The number of construction workers has grown from roughly 1.1 million in 1940 to 8.3 million last month, but the acute labor intensity of modern construction means that buildings are more expensive than ever.
We see whole systems buckling under the deferred maintenance. A combination of a car crash blocking the Lincoln Tunnel and an electrical failure of NJ Transit’s train network into Penn Station practically stopped all movement of New Jersey residents into New York City earlier this week (except for those who swam the Hudson River, of course). Southern California experienced rolling power outages due to a searing heat wave as tens of thousands of acres burned in the Bridge and Line Fires and an earthquake shook the region. Michigan suffered multi-day power outages due to storms and a heatwave. A drop of chaos and the whole world shuts down.
Unsurprisingly, people are leaving these developed but degrading regions in the Northeast, West and the Midwest for the pearly newness of the Southwest, Texas and Florida. I spent the weekend in The Villages in Florida, where tens of thousands of new homes are under construction sprawling to the horizon and will effectively double America’s most populous retirement community. It’s fresh, it’s clean, it’s new; it’s the only place that I have been to in the United States that feels like the frantic evolution of an Asian megacity, where every visit delivers a visceral shock as one witnesses a whole new town that didn’t exist before (construction time on homes from start to finish is roughly 65 days).
The migration of Northern snowbirds to warmer climes can only dampen the pressure on America’s brittle infrastructure so much — maintenance must handle the rest. Franklin D. Roosevelt’s rural electrification program in the 1930s is now a century old, and those wires are still threading the wilds from California to Tennessee. The bridges and tunnels of the Eisenhower highway system are hitting their structural age limits, with no comprehensive and funded national plan to replace them. Water and sewage systems are buckling under the extremes of a climate-disrupted world. Internet access (something new!) is embarrassingly expensive and unreliable for the majority of Americans. SpaceX’s Starlink on a United plane will likely be faster than home internet for most Americans.
We clearly have the money, we just lack any alchemical capacity for transmuting greenbacks into productive construction and maintenance. Little surprise: the construction sector’s productivity growth has been minimal over the past few decades. That’s why America is rich, and yet feels poor. It only took a pandemic, climate disasters and populist anger to bring attention to the issue.
America is hardly alone in this feeling though as Europe is going through its own travails. Expansive inbound funding in the imperial centers over the past few centuries offered an economic system that afforded affluent ease — an extractive model that has never truly been replaced.
Now the European Commission is looking to fix Europe’s underlying competitiveness problem. In a landmark report published this week by former European Central Bank president Mario Draghi, the Eurocrat-par-excellence tells his peers to wake up and get their house in order.
Europe has been worrying about slowing growth since the start of this century. Various strategies to raise growth rates have come and gone, but the trend has remained unchanged.
Across different metrics, a wide gap in GDP has opened up between the EU and the US, driven mainly by a more pronounced slowdown in productivity growth in Europe. Europe’s households have paid the price in foregone living standards. On a per capita basis, real disposable income has grown almost twice as much in the US as in the EU since 2000.
Where does that wide gap come from?
First – and most importantly – Europe must profoundly refocus its collective efforts on closing the innovation gap with the US and China, especially in advanced technologies.
Europe is stuck in a static industrial structure with few new companies rising up to disrupt existing industries or develop new growth engines. In fact, there is no EU company with a market capitalisation over EUR 100 billion that has been set up from scratch in the last fifty years, while all six US companies with a valuation above EUR 1 trillion have been created in this period.
This lack of dynamism is self-fulfilling.
What’s the cause?
First, Europe is lacking focus. We articulate common objectives, but we do not back them by setting clear priorities or following up with joined-up policy actions.
For example, we claim to favour innovation, but we continue to add regulatory burdens onto European companies, which are especially costly for SMEs and self-defeating for those in the digital sectors. More than half of SMEs in Europe flag regulatory obstacles and the administrative burden as their greatest challenge.
Across hundreds of pages, Draghi and his policy team have assembled a gimcrack industrial policy for centering Europe’s national and supranational bureaucracies on growth. It’s what Europe needs — but is it what Europeans want? (Hint: Not really)
That question holds a parallel in Japan, where this month the ruling Liberal Democratic Party (and its diminutive competitor the Constitutional Democratic Party of Japan) are having a once-in-a-lifetime free-for-all to replace outgoing prime minister Fumio Kishida. Earlier this week, the party confirmed that a record-smashing nine candidates will run for the September 27 election, with an unusually diverse set of policies on offer.
The most interesting candidate has been Shinjiro Koizumi, who at 43 would be among the youngest PMs in rapidly-aging Japan’s history. He is the son of former prime minster Junichiro Koizumi, who Americans will remember for visiting Graceland with George W. Bush while singing Elvis songs. Shinjiro has emphasized a need for policymaking speed to rapidly accelerate Japan’s economy after years of Abenomics finally moved the needle on deflationary stagnation. He and a number of other candidates are almost taking a page from Draghi by emphasizing the need for homegrown disruptive startups and a digital transformation to improve productivity in a recalcitrant country that still obsesses over fax machines even as deaths outnumber births. A vote and a runoff will determine the victor in two weeks.
China, in its own way, is taking a different approach. As Eleanor Olcott and Wang Xueqiao noted in The Financial Times this week, President Xi Jinping’s approach to economic dynamism has been devastating to startups the last few years. Just take a look at this astonishing graph:
There’s admittedly a lively discussion online on whether this chart is a fluke of the underlying data or a decidedly inaccurate presentation of China’s economy. One thing is clear though: like America’s deindustrialization and financialization, the effects of Xi’s catastrophic policies will take time to manifest. But the lack of indigenous dynamism will inevitably manifest. China may maintain its edge in manufacturing, where state-directed coordination can offer a competitive edge against unfocused Europe and libertarian America. China will — barring catastrophe and America’s most aggressive intentions — become a dominant chip power in the years ahead. But state-directed innovation has a very poor track record, and one that China’s leaders seem loathe to remember.
The vagaries of competitive economies means that there is always a new crisis to tackle. Something must fall behind everything else, and we will always focus on our points of weakness. Yet, I’m constantly reminded that the wealth that powers our quality of life isn’t a guarantee — it’s a choice. And it’s a choice we have chosen to ignore for far too long. A slew of triggers the past few years have reminded us of our past idiocies, and how much we need to change to build a better future.
The Orthogonal Bet: How to Navigate Complexity Within a Large Organization
In this episode, Lux’s scientist-in-residence Sam Arbesman speaks with Alex Komoroske, a master of systems thinking. Alex is the CEO and co-founder of a startup building at the intersection of AI, privacy, and open-endedness. Previously, he served as the Head of Corporate Strategy at Stripe, and before that, spent many years at Google, where he worked on the Chrome web platform, ambient computing strategy, Google Maps, Google Earth, and more.
(He also happened to be the “chief of fun” for your humble editor’s product management onboarding at Google.)
The throughline for Alex is his focus on complex systems, which are everywhere: from the Internet to biology, from the organizations we build to society as a whole. These systems consist of networks of countless interacting parts, whether computers or people. Navigating them requires a new mode of thinking, quite different from the top-down rigid planning many impose on the world.
His more bottom-up, improvisational approach to systems thinking reveals insights on a range of topics, from how to approach large tech companies and the value of startups, to a perspective on artificial intelligence that untangles hype from reality.
🔊 Listen to “How to Navigate Complexity Within a Large Organization”
Lux Recommends
- Peter Hébert points to a fascinating Christie’s auction labeled “Gen One: Innovations from the Paul G. Allen Collection.” The famed co-founder of Microsoft, who passed away in 2018, amassed a timeline of humanity’s greatest computers, including an IBM 650 Magnetic Drum Data Processing Machine (sold for $138,600), a PDP-5 Minicomputer from Digital Equipment Corporation ($44,100) and an Apple-1 Personal Computer ($945,000). You can’t train an LLM on any of these boxes, but one wonders where an Nvidia H100 chip will one day sit in the pecking order of humanity’s computational history.
- I enjoyed this short photo essay of Treb Heining, the man who invented the balloon arch and who has made the spectacle of the celebratory balloon drop the heart of his business life. “Treb Heining has been in charge of the balloon drop at every Republican National Convention of the past three decades, as well as many of the Democratic conventions during that time. He started as a balloon salesman at Disneyland when he was 15 in his native Anaheim, California, and now, as chief executive officer of GlassHouse Balloon Co., Heining supplies them to many Disney properties around the world. He’s designed balloon releases for Super Bowls and Olympic opening ceremonies, and he drops confetti in New York’s Times Square every New Year’s Eve.”
- Sam enjoyed Kurzgesagt’s short and humorous video, “Something in Your Kitchen Emits Antimatter.” If I scrounge hard enough, I might just be able to build a warp drive next.
- That pivotal book of every aspiring urban planner and politician, The Power Broker, just turned 50 this week, and author Robert Caro at 88 years old is still plying his trade as he rapidly tries to finish his Lyndon B. Johnson series. Accolades and remembrances poured in, and two notable ones included Christopher Bonanos’s feature “In the Shack With Robert Caro” and Alexandra Alter’s piece in The New York Times. “That Caro’s work is still done on paper, with no digital backup to speak of, marks him as one of the last of his kind. (He had never seen a Google doc until I offered to show him one. He was mildly startled to discover that, in a shared document, the person on the other end can be seen typing in real time: “That’s amazing. What’s it called? A doc?”)”
- Finally, I didn’t get around to Britain’s (mis-)fortunes in the column, but Britannia doesn’t seem to rule the waves much these days. Shashank Joshi writes on the island’s challenges with its submarine fleet in The Economist, where a combination of de-skilling and poor planning is laying waste to the once vaunted fleet. It’s a parable that we should all learn from, urgently.
That’s it, folks. Have questions, comments, or ideas? This newsletter is sent from my email, so you can just click reply.