US Economy Series: US Economic Competitiveness

The United States has long been one of the most, if not the most, competitive economies in the world, but what makes the US economy so competitive and is it at risk of losing its edge?

Innovation and Technology

Technology and innovation, with the US leaps and bounds ahead of most of the world, form a core of American competitiveness. US companies lead the world in, among other things, artificial intelligence, and digital infrastructure. At the same time Silicon Valley remains the global epicenter of tech entrepreneurship while US investment in R&D significantly ahead the rest of the world, positioning the US as a leader in the industries of tomorrow.

A Flexible Labour Market

The American labour market is among the most dynamic in the world. Compared to many advanced economies, the US offers fewer labour regulations, making it easier for businesses to scale up or down in response to economic conditions. Although it has it's downsides such as wage volatility, job insecurity, and weaker safety nets, this flexibility at least supports relatively fast employment recoveries after economic shocks.

Access to Capital

From Silicon Valley to Wall Street, access to capital is a critical pillar of American economic competitiveness. The US boasts the deepest and most liquid financial markets in the world, allowing companies to fund innovation, expand operations, and attract global investment.

Venture capital thrives, particularly in emerging tech sectors like AI. Public markets are transparent and efficient, and the US dollar remains the world's primary reserve currency, reinforcing the strength of its financial ecosystem and encouraging inward foreign investment.

A Massive Consumer Market

With a population of over 330 million and one of the highest per capita incomes globally, the U.S. represents a consumer market that is both vast and wealthy. This scale attracts domestic and international businesses alike and enables companies to test, launch, and scale products faster than almost anywhere else.

Consumer demand also fuels innovation, as firms compete to meet the expectations of a large band savvy population.

However this should be balanced with strong export and investment cultures.

A Strong Legal and Institutional Framework

The US legal system offers robust protections for property rights, intellectual property, and contract enforcement, critical elements for a functioning, competitive economy. Transparent regulatory processes, independent courts, and a stable rule of law make the US an attractive environment for business and investment.

Political Landscape

Still, increasing politicisation and regulatory uncertainty in sectors like international trade, tech and energy pose risks and disincentive investment.

America’s policy environment has historically favored entrepreneurship and innovation. Tax incentives, deregulation, and trade liberalisation have helped American businesses thrive.

However, political polarisation has led to unpredictability. Immigration reform, trade policy, climate regulation, and tax laws often shift dramatically with each administration, creating uncertainty for long term business planning.

Infrastructure:

Despite its wealth, the US has long struggled with aging infrastructure, from crumbling bridges and congested airports to relatively limited public transit such as train links (compared to many countries). Significant investment needs to be made in this "hard" infrastructure, from transport links to energy, to maintain and improve economic competitiveness.

Education and Skills

The US is home to many of the world’s top universities and research institutions, attracting talent from around the globe. But education outcomes are uneven, with wide disparities by region and socioeconomic background. Additionally, the skills gap is a growing concern. High tech industries face shortages in key areas such as engineering, cybersecurity, and AI. 

Debt: A Growing Concern

The US, like many countries around the world has a debt problem, both public and private.

In terms of the public debt, this now exceeds 100% of GDP. Servicing this debt consumes an increasing share of the federal budget, limiting room for investment in innovation, infrastructure or education.  The size of the debt also gives the government less room to manoeuvre when the next crisis hits.

In regards to private debt, while in itself isn't a bad thing, significant private debt poses a significant risk to the financial system which was laid bare during the 2008 financial crisis.

Long term fiscal sustainability remains uncertain but the situation is likely to get worse in the years and decades ahead.

Conclusion

The United States remains one of the most competitive economies on Earth, thanks to its innovative and entrepreneurial spirit, and institutional resilience and legal system. But this strength is not guaranteed. To stay ahead in a rapidly changing world, the US must address its fundamental issues, reducing political instability, investing in its infrastructure and people, and managing it's debt.