Simon Rabinovitch joins Jordan McGillis to discuss strengths and challenges of the U.S. economy.
Audio Transcript
Jordan McGillis: Welcome to 10 Blocks. I’m Jordan McGillis, economics editor of City Journal. In the final months of 2024, economic indicators have looked astonishingly strong for the United States. Inflation has fallen to 2.5 percent. Unemployment has remained near record lows. The stock market has surged to record highs and yet ask Americans how the economy is faring and they’re more likely to tell you it’s not doing well. To discuss the state of American economic affairs heading into 2025 and the discrepancies between metrics and opinion, I’ve invited Simon Rabinovitch onto the show. Simon is U.S. Economics Editor of The Economist. Simon, thanks for joining.
Simon Rabinovitch: Great to be here, Jordan. Thank you.
Jordan McGillis: In recent months, your coverage has celebrated the American economy as triumphant standing head and shoulders above peer countries. What indicators are you looking at that that position?
Simon Rabinovitch: We look at a variety of indicators, but I guess there‘s two big dimensions that we‘ve looked at. And just to be clear, we first began to go big on this topic late in 2023 when the degree of the out performance was already clear. But the two dimensions, one is the more obvious one, which is the recovery from the COVID pandemic, and I think that‘s got a lot of attention by now. But for example, you look at real GDP growth and if you go back to the beginning of 2020 to today in America, real GDP growth has been north of 10 percent in virtually every pure country. So by pure country, I mean other rich world countries, other developed economies. The G7, but broader than just the G7 as well. The average is less than half of that. So just an astonishingly strong recovery over the last five years.
The other dimension though, which I think has got a little bit less attention is that if you go back actually several decades, so to the early 1990s, there you have an American economy that has just again, gone from strength to strength. And I think often the conversation in America is about the U.S. versus China. And of course China has had a remarkable period of development, but it was starting from a very low base. But with our coverage, we looked at America relative to Japan, relative to Western Europe, Canada, Australia, other developed economies. And it’s by that metric that you see America has gone from, for example, roughly 40 percent of the G7 economic size to about 55 percent. So like for like, comparing apples with apples, America has done remarkably well, not just the last five years, but the last 35 years.
Jordan McGillis: Right. There was a really funny bit that you guys did in a recent piece that started with a quote from a competitiveness commission that was advising Congress, and it lays out how the economy is condemned to slow growth. And then you say, “Oh, this is actually 1992.” And then you go on to explain how the Japan scare proved to be really short-lived, and the U.S. economy and worker productivity has really outpaced even that nearest peer rival from that era.
Simon Rabinovitch: Yeah. That’s right. That was the introductory to what we call a special report. It was like a 10-page special section where we looked at a series of different ways in which you could break down U.S. out performance. So obviously growth. And we looked at productivity. We looked at financial markets, stock market out performance, America’s energy independence. And we also looked at obviously there are flies in the ointment. We looked at inequality in America, we looked at political dysfunction and concerns about fiscal stability. So we threw all of that into it. But as you said, the start of that article was this competitiveness commission from the early 1990s. And a lot of the concerns and worries sound very familiar to what you sometimes hear today, except that one, it was Japan, not China. And two, we do know now how well the last 35 years have actually turned out for the U.S..
Jordan McGillis: A lot of U.S. growth is attributed in this contemporary era to the success of tech startups. How do you analyze that thesis? What are the compelling aspects of it, and is it good or bad for the American economy if true?
Simon Rabinovitch: Well, it’s definitely true. There’s no question that one of the motors of America’s success is innovation broadly, but then specifically it’s not really innovation in the construction sector or in the restaurant sector. It is the tech sector. But it’s more than just the tech sector in the sense that what allows America to have Silicon Valley? Why has Europe struggled to do the same? And so you then look at the education system, especially the university system and America’s ability to be a magnet for global talent. You then look at churn in the labor market and the fact that you’re able to have an allocation, a reallocation of labor to companies that are doing well. The fact that you have risk capital that can begin to support the development of these companies. And also just a fair bit of geographic flexibility that compared to other countries, Americans are still more footloose, more willing to get up and move to where there are opportunities.
And then outside of the tech sector, you then have a greater degree of adoption of many of the innovations that come from Silicon Valley. And of course we know now Silicon Valley is too narrow of way to talk about it. Especially post-COVID with the rise of remote work. We have tech sectors that have cropped up everywhere from North Carolina to Oregon. So it’s not just a California story. But you look at the next wave of innovation with AI and a lot more American businesses are willing to experiment with that and put it into practice. And so I guess in the way that we talked about that competitiveness commission in the 1990s and how there were those concerns, you now have Europe that is doing deep reports about why is the U.S. so strong in tech and why are we so weak and what can we do about it?
Jordan McGillis: There’s a number of things I want to tap into there. One being the mobility and dynamism in the U.S. economy, which in many ways is declining, but still better than other countries. But first I want to talk about high human capital attraction that the American economy and political ecosystem displays. One very clear example would be the Collison brothers that founded Stripe, Patrick and John. They’re from Ireland. And you’ll see Irish and European politicians celebrate their success, but they didn’t do it in Ireland. They came to California and have built a tremendous company here.
Simon Rabinovitch: Yeah. That’s a great example. And so there’s a few things that are pushing in that direction. So one, you’ve got the universities and sometimes despite the best efforts of American politicians still, this is where the best and brightest want to come to go to university. Number two, and I think it’s important to recognize the compensation system. If you’re incredibly successful in America, you can often keep the fruits of your labor. Every now and again, you’ll see tweets that will go viral on X as it’s known these days from entrepreneurs from say Northern Europe who say it’s impossible to get anywhere because once you start to get a return, you have to pay huge tax on unrealized capital gains. And that’s even before your company is profitable, but your equity has gone up, so you’re chopped off at your knees before you can start.
And then you begin to have just this cluster effect. So there’s a path dependency. Once you have the talent and you’ve got the money, strength begets strength. I guess another metaphor that you sometimes hear is flywheel and America has that flywheel that just turns and turns. And so if anything, the advantage is getting bigger because we’re seeing once again, the next wave of innovation AI is very much an America-led story. And financial markets. London used to think of itself as a potential rival to New York, but these days, any European company that’s serious about raising capital, they’ve got to list in America. And then the entrepreneurs come over. And so America has a real natural endowment, a real gift and that’s where things stand.
Jordan McGillis: I’m fairly convinced of everything that you’ve been reporting, and yet I have this cognitive dissonance on this. I participate in some intellectual groups on the topic of progress studies. And one of the focuses there is declining productivity growth and inability for the United States and other Anglosphere countries to build things quickly. And that seems true as well and yet in aggregate, we’re still doing better. Is it that everyone else is just really, really bad at these things and the U.S. is moderately less bad, or do you think the U.S. has something good that enables it to surge in a positive direction?
Simon Rabinovitch: Well, so there’s a few different topics that come out of that question, which is a really complex one. So productivity data generally, the first caveat is that it’s very difficult to measure productivity. There’s different ways of doing it. One of the ways that economists like to use is total factor productivity, which strips out investment, strips out labor, and then what you’re left with the residual is productivity. And when you look at it in those terms, slow productivity growth, that is a global problem. Every country, every region to varying degrees has seen productivity growth slow down over the last couple of decades. Even China, which people think of as a country that moves fast and builds things quickly, is also struggling with lower and lower productivity growth. So yeah, on a relative basis, you get into the ugliness contest and productivity looks bad. It looks ugly in America, but it’s less ugly than in many other countries.
But the other point is that looking at productivity economy-wide is the way it’s often measured. But really it’s specific sectors and oftentimes even just specific companies that drive productivity. And so in America you have that paradox where it does take a long time to build things. Construction is really, really unproductive. The construction sector. It’s really hard to build basic infrastructure. Productivity data in the construction sector is abysmal. And so the things that you see on a daily basis on your commute or whatever, it just seems like, God, this country goes slow as molasses. But then you have this race car tech sector, which for me, it just boggles the mind. What stands out about the period 2007 to 2009? Well, from an economic standpoint, you think about the global financial crisis, but if you think about innovation, that’s when the iPhone took off and all of the incredible impacts that it had.
Well, when you think about the 2020 to 2022 period, what do you think about? Many people would say COVID and the stupid lockdowns and just the economic damage. But this is also the period when gen AI took off massively. So it’s just an example of how you can have, from the macro perspective, things don’t necessarily look great, and there’s obvious things hitting you in the face that look bad and slow, and yet you’ve got this race car tech sector just leaping ahead. So I think that’s part of it. In terms of the slowness of making things beyond just construction, there’s the manufacturing piece of the puzzle. And there’s no question that manufacturing in America is weaker than it ought to be if you’re looking at it from a national security standpoint. And that’s a whole other debate about should America invest more in manufacturing? Probably makes sense from a national security standpoint. It may be inefficient economically, but there may still be reasons to do that.
Jordan McGillis: Okay. I want to draw the dynamism and mobility piece into this next question. I want to ask you about the post 2000 thousand China shock, how that has affected people’s interpretations of the economy and how states, the federal government and communities have responded. Pretty open-ended. Take it from there.
Simon Rabinovitch: Yeah. So I would not belittle or question the fact that there are parts of America and segments of the American workforce that had their world turned down really starting in the late 1990s when trade with China began to boom, and then certainly into the 2000s. So I don’t question that. I do think that it’s an example of there’s a lot of great economic literature and research out there that doesn’t necessarily break through to a popular audience, and this research did. And I think partly it’s because just that phrase, “the China shock” is so compelling and attention grabbing. But a lot of-
Jordan McGillis: Extraordinary marketing.
Simon Rabinovitch: It is. Yeah. Exactly. It is. But a lot of economists question the findings. And if you look at it ... And forgive me, I don’t have the exact precise number, but I believe David Autor and his fellow economists, when they looked at China shock, they were able to pinpoint something like 500 to 800,000 jobs that were lost as a result of the China shock.
What you look at labor market data month in month out, and recently America has been generating about 150 to even 300,000 new jobs per month. So that level of job loss in aggregate relative to an economy the size of America’s is you’re talking about four or five months’ worth of normal job creation. So I think the aggregate size of the China shock maybe has been exaggerated. I think the real problem is that you had specific localities where they really felt the weight of that adjustment. They were the ones that had their factories being shuttered. And so it’s easy for an economist to say, “Oh, there’s great labor mobility in America. You can move from place to place.” But hey, if you’ve got a multi-generation family and you’ve grown up in this town in Ohio or in Michigan, you’re not just going to pick up stakes and move to Florida or California or wherever the jobs are. That’s hard to do.
But I do think where we are now nearly in 2025, and it’s been a quarter-century basically since China joined the WTO, and you look at America’s unemployment rate and people are getting worried about weakness in the labor market, and yet the unemployment rate is 4.2 percent. Prime age labor force participation rate is near to all-time highs. If there was a China shock, it has been more than digested and absorbed right now. And you have an economy that has adjusted itself and is no longer a strong manufacturing economy and yet is still grown incredibly strongly generating strong wage growth, generating lots of employment. So this is a flexible dynamic organism and I don’t think the China shock has stopped America. There is that other question though, which is from a national security standpoint, does it make sense to have offshored so much manufacturing? And I think the answer there probably is no. But that’s a-
Jordan McGillis: That gives an easy out for those of us who lean neoliberal. We can always say, well, it was good, but the national security side did need to be considered. So I find it unsatisfying to bring that in at the end. I want to narrow in on the economic aspect here. Despite the fact that I am convinced, as you are, that the U.S. economy has digested the China shock it remains the case that a major political shift has occurred seemingly as a result of it. The entire narrative constructed by vice President-elect J. D. Vance revolves around the decimation, the hollowing out, as they say of the communities, the political effects are long-lasting, very durable. Do you think that there’s credibility to the case I’m making here that the China shock may have been digested economically, but is now the most influential political force that’s now leading economic policy?
Simon Rabinovitch: Well, I don’t think it’s just about the China shock. I think when you look at the success of Donald Trump ... And let’s be clear. It’s the success of Trump, not success of J. D. Vance. I don’t know if J. D. Vance’s message would’ve gone down as well at the polls as Trump’s message.
Jordan McGillis: Fair point. But Vance makes it in a more cogent manner.
Simon Rabinovitch: He does. He does. Except that you do have that question then of that dark message, if you present it without the objective humor and levity that Donald Trump can bring to the moment, it may not have gone down as well. Because I think a lot of Americans are still ... Sure, they have pessimistic moments and they have reasons for cynicism and all that. But I think also fundamentally it’s a hopeful country with a belief still in progress. And I think Trump maybe does a better job of embodying that than J. D. Vance. But I do think the populist message, it’s about more than the China shock. I think probably what resonates more is chaos on the southern border and of course the inflation of the last four years. So I think at this point that more than the China shock and probably the element of the China shock, which has had a more durable impact on local communities has been the spread of fentanyl. And that has obviously devastated many local communities, many rural areas. That is a China shock. And I think that has been key to the messaging of Donald Trump and to the appeal of him as well.
Jordan McGillis: Let’s talk about the last four years and the inflation experience that has left people so sour on the economy. It’s come down seemingly. We are approaching a soft landing here if we haven’t already landed. And yet, as you’ve noted in your work, far more Americans say the economy’s getting worse than getting better. What are the real impacts on wages from inflation in this last four- to five-year period? And are wages in the various quintiles keeping pace with or outpacing or under-pacing inflation?
Simon Rabinovitch: So the headline story and I guess one of the reasons why there was discontent for some time is that the inflation outbreak really began in late ‘21, early ‘22. And for the first 18 to 24 months inflation defined broadly, so if you look at the CPI, full basket, not core, etc or anything, just the consumer price index was rising faster than wages. In the last 12 months that has flipped around to the point that you now have wage growth outstripping CPI. So there was a process of, say the first half of the inflation episode, people were getting poorer in real terms, were able to buy less with their paychecks. And the last year they’re basically the last half that’s begun to unwind. And now people in real terms... They may not feel it, but they are actually able to buy more with their money. If you then look at the income quintile breakdown, what you find is that in fact, the lowest quintile is the segment of the population that has done the best. And the reason for that is... I think this has faded from the headlines, but we can all remember how incredibly tight the labor market was in ‘22, ‘23, how difficult it was to find workers. And that led to strong wage growth, especially for lower income workers. So you do have a situation-
Jordan McGillis: In effect that bottom quintile wage growth is the opposite side of the coin of inflation for the median individual, right? When we are going out to a restaurant, it costs more because that person is making more money because of the tight labor supply.
Simon Rabinovitch: That has been a huge piece of the puzzle. And the other things feed into it as well. Rent and costs and utilities and all that. But absolutely you are right. Rising labor costs, which are good for the workers and not good for the customers. And so you can see from a political standpoint, how this has been problematic is that the median American has in real terms, done badly from 2021 until 2023 and the gains of the last year, people haven’t really sat up and paid notice to that yet. But the good story is that lower-income Americans, they’ve done well, they have done well.
Jordan McGillis: A couple more thoughts there. One is that the median income earner is in a more stable job than the job switcher in the bottom quintile. So that person is going from one restaurant to another to a different service job, and they’re seeing gains as they go. Whereas the median person is more likely to have a job for which they haven’t seen an increase in pay because they haven’t switched. So as you say, it’s two different segments of the American population are experiencing it differently. And then another element that I wonder about, is it the case that that median wage earner is also a more likely voter and so therefore there’s more discontent among likely voters than across workers generally?
Simon Rabinovitch: That’s a great conjecture and I think it’s probably right. I personally have not seen the breakdown of the data with the exit polls from the election to back that up. But I’m sure you’re right, Jordan. You’re right about that. And you’re obviously right about the job switcher premium as well. So yeah. I think that does feed into it. And also I think wages going up, it’s a slow process. It’s understandable that people are just dissatisfied. They go to the grocery store on a daily basis, they see prices have gone up. There’s a lot of research now showing that when there is a big surge in inflation, inflation has a long half-life. So you’ve got that surge in inflation in 2022. It’s only now two years later that people have kind of gotten used to the higher price level. So I think that all plays into it.
Jordan McGillis: I’m still seeing a lot of egg price tag content on social media, so I don’t think people are completely adjusted yet. I want to talk about class and inequality. I think that the way people are tending to discuss it these days, it’s those of the American population with college degrees and those without that seems to be the most salient dividing line. How have those two groups, if we were to bracket people in those ways, how have they fared in the era of Bidenomics respectively?
Simon Rabinovitch: Well, that’s a really, really fascinating point because I think you get into the question then of what drives people when they get into the ballot box. So you’re absolutely right that one of the biggest predictors of party affiliation right now is college versus non-college education. However, if you look at the income performance precisely because a lot of lower income workers and those who were in what you might think of as more menial jobs were the ones that benefited from the tightness in the labor market. In fact, those without college degrees outperform those with college degrees over the last few years. So you can’t reduce things to economics alone. You and I think that economics is the most important thing going on, but in terms of what drive people’s political decisions, it is not just the bottom line. There’s lots else going on.
Jordan McGillis: The director of research at the Manhattan Institute, Judge Glock, he is of the perspective that it’s the economy, stupid. He points to exit polls that show in his interpretation that people from blue collar industries were voting on the economy and voting against the democratic platform. I personally remain unconvinced. I think there are a lot of cultural aspects embedded in the way we’re interpreting the economy. But it’s certainly a fun discourse to be engaged in.
The last thing I want to ask you about, very sensitive topic, the heinous and brazen murder of the executive from UnitedHealthcare. The alleged murder, until proven guilty of course, the alleged murderer has justified this on a platform basically arguing that the American healthcare system is unjust, hurts poor people. He of course himself was rich. That’s neither here nor there. And people have found that to be compelling. It served as a rallying cry in somewhat surprising ways across mostly the internet. I don’t know if there have been real world demonstrations. There are a lot of people that are rallying to that hue and cry. Do you think that there is a latent almost occupy Wall Street leftism that’s still out there that could lead to a surge among perhaps the Democratic Party of a Bernie Sanders type of wing?
Simon Rabinovitch: Oh, wow. There’s a lot in that question there. So first of all, just to say that the alleged murderer’s criticism of the healthcare system, we have written about this as have others, and I said his criticism just comes up short. And it’s obviously tragic events and just the basis of his thesis is weak. Yes, yes, healthcare costs in America are incredibly high and insurers share part of the blame, but there’s just much more complexity in terms of the way healthcare is delivered and the problem with high costs at the provider point of delivery as opposed to just what the insurers are covering or are not covering. So put that to one side for a second.
What does it mean for the Democrats and the potential for a rabble-rousing progressive? I think there is latent support for that. I do think though the lesson certainly of the way that Biden tried to run the economy and the way that they tried to give everything a progressive gloss is that although there might be a solid group within the Democrats who would be excited by that, I don’t think that is what the median voter in America wants. So we we’ll see what the Democrats do in the run up to 2028, but if they nominate somebody who’s a younger version of Bernie Sanders, yeah, I can imagine that exciting the party faithful, but I don’t think that’s going to be a winning recipe for the country.
Jordan McGillis: Okay. Last question I’ll ask. As we head into 2025, a new administration is coming in, there will be some policy changes. What do you think will actually be significant in a positive or negative way for U.S. economic performance from the Trump administration?
Simon Rabinovitch: Well, it’s the big categories that everybody is looking at. So how serious is he about tariffs is number one. Number two is how serious is he about the crackdown on immigration, and does this involve mass deportations? Number three is where he gets with his tax cuts. And then number four is how wide-ranging and ambitious is the deregulatory agenda. So those are the four big buckets to watch. And markets are notwithstanding the... We were speaking two days after the fed meeting when the S&P went down by about 3 percent. So notwithstanding that. The markets have been very, very optimistic about Trump’s agenda. But what that optimism is based on is the view that he’ll get far with deregulation, he’ll get far with tax cuts, and he won’t go as big on tariffs or immigration as some of his stump speeches made it seem. So that’s the optimistic case. The bear case is that maybe he’s going to struggle a bit on the tax cut side of thing and unilaterally he can actually do a fair bit on tariffs and immigration. So I’m hopeful that the markets are right, but that’s definitely what we’ll be watching in the new year.
Jordan McGillis: Our guest today has been Simon Rabinovitch. Simon, where can our listeners follow your work?
Simon Rabinovitch: Well, best thing to do is to go to economist.com, take out a subscription. They’re very affordable and you get a lot, not just for me, but for my colleagues all over the world, including on the ground in Ukraine and Syria. If you have not checked out The Economist before, it is the premier international finance and political magazine for a reason.
Jordan McGillis: As a subscriber I will concur with that assessment. Simon, thank you so much for joining us.
Simon Rabinovitch: My pleasure, Jordan.
Jordan McGillis: Thank you for having me.
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