Why Doesn't the World Imitate the U.S.?

What makes some nations wealthy and others not?  One way to address that question is to look for patterns: what do wealthy nations do that non-wealthy nations don't?

According to the CIA World Factbook, the U.S. has a GDP per capita of $49,000, and there are 10 nations wealthier than the U.S.  (I use Gross Domestic Product per capita Purchasing Power Parity for comparisons, which is as apples-to-apples as I think you will be able to get.)  Here are those 10 countries.

• Liechtenstein ($143,900).
• Qatar ($104,300)
• Luxembourg ($81,100)
• Bermuda ($69,900)
• Singapore ($60,500)
• Jersey ($57,000)
• Falkland Islands ($55,400)
• Norway ($54,200)
• Brunei ($50,000)
• Hong Kong ($49,800)

One thing all those countries have in common is small populations.  The largest population on that list is 7.2 million, for Hong Kong.  In comparison, the U.S.'s is 314 million.  New York City, all by itself, has a population larger than Hong Kong's.  There are 12 U.S. states with larger populations.  Four countries on that list have populations less than 100,000, or less than Broken Arrow, Oklahoma.  Another two have populations smaller than Tucson, Arizona.  Only four on that list have populations exceeding a million, or comparable to, say, Dallas.

The population of the Falklands is a mere 3,140.  You read that right: three thousand.  If we want to compare small to small, I could name four U.S. zip codes where the average annual income exceeds $3 million (compared to the Falklands' $55K).

Beyond being small in population, three countries on that list are oil-rich (Norway, Qatar, and Brunei), and another three to five might classify as international tax havens.

All that was a long way of saying that the U.S. is essentially the richest country in the world, once you exclude some tiny ones with unique attributes.  In fact, the U.S. is the richest country with a population greater than 7.2 million.

So there is a case to be made that the way to be a rich country is to imitate the U.S.

The Second Tier.  Only two more countries are within even 90% of us: Guernsey, another tax haven with a population of only 65,345, and the United Arab Emirates, another oil-rich country with a population just over five million.

The Third Tier.  And below them are only 10 nations with wealth within 80% of ours.  We can easily dismiss two of them as very small (population under 100,000) and likely tax havens: Caymans and Gibraltar.  And we can dismiss Kuwait as oil-rich.  And of the remaining seven, only two have populations exceeding even ten million: the Netherlands (17 million) and Canada (34 million).

So of all the nations in the world with populations exceeding 10 million, only two are even close to us: the Netherlands (87% as rich) and Canada (84% as rich).  If you are curious, Germany is 78% as rich as us, the U.K. is 75%, France is 73%, and the EU average is 70%.  The rest of the world, meaning 83% of the nations on earth, is even less wealthy than that.

Knowing nothing else, it sure seems like Europe and the rest of the world should be imitating us, not vice-versa.

Over Time.  These relative comparisons among European countries and the U.S. are also fairly steady over time.  They have not changed all that much in the last 30 years.

Take the Netherlands.  In 1980, it was 87% as rich as us.  In 2011, it was 87% as rich as us.  Three decades and no change.

As for Canada, it dropped from 91% as rich in 1980 to 84% in 2011.  (All of that drop was from 1980 to 1991, or the end of the Pierre Trudeau era and the beginning of the Brian Mulroney era.)  France and Germany also lost a little ground to us since 1980.  The U.K. gained a little -- from 65% to 76% as rich as us.  (You Brits may thank Maggie Thatcher for that.)

So why doesn't the world imitate the U.S.?  In round numbers, then, the U.S. is about 30% to 40% richer than Europe, and has been for at least about three decades.  And of course, the rest of the world is generally even farther behind.

Again, why isn't everyone trying to imitate the U.S., instead of the U.S. electing politicians who seem ever more determined to imitate Europe?

One reason is what I pointed out in a previous article.  Due to the distribution of wealth, the bottom 40%-50% of the people in many European countries are better off in their countries than the U.S., even though the U.S. is, on average, one third richer.

That same concept could explain why a near-majority in the U.S. would support less overall wealth if that wealth were spread more evenly.  When I wrote about that earlier, I said there was "a fly in that ointment."

The fly is this: Europe and much of the rest of the world are freeloading off the U.S., which is generating the real wealth largely because of its inequality.

That is actually a pretty bold statement, so I will cite an authority: an MIT Department of Economics paper by Daron Acemoglu of MIT, James A. Robinson of Harvard, and Thierry Verdier of the Paris School of Economics.

We show that, under plausible assumptions, the world equilibrium is asymmetric: some countries will opt for a type of 'cutthroat' capitalism that generates greater inequality and more innovation and will become the technology leaders, while others will free-ride on the cutthroat incentives of the leaders and choose a more cuddly form of capitalism. Paradoxically, those with cuddly reward structures, though poorer, may have higher welfare than cutthroat capitalists; but in the world equilibrium, it is not a best response for the cutthroat capitalists to switch to a more cuddly form of capitalism. [My emphasis.]

Why would this be so? Why is inequality "good"?

A greater gap of incomes between successful and unsuccessful entrepreneurs (thus greater inequality) increases entrepreneurial effort and hence a country's contribution to the world technology frontier.

We all know that the U.S. has been defending Europe and the "free world" since World War II.  But the U.S. spends just 4.06% of its GDP on defense, according to the CIA World Factbook.  France spends 2.6%, and the U.K. spends 2.7%.  That 1.5%-of-GDP gap is not significant in explaining the differences in wealth.

Take Canada, which spends only 1.1% of its GDP on defense and is one of the wealthier large countries.  It is 83.9% as wealthy as the U.S.  If you net out what we both spend on defense, it is still only 86.5% as wealthy as the U.S.  Defense spending does not explain the large differences in wealth between the U.S. and most of the world.

So, yes, the free world freeloads off us for defense.  But that's a minor part of its total freeloading portfolio.

We often hear things like "Americans constitute 5% of the world's population but consume 24% of the world's energy." W hat you don't hear as often is how much we produce.

From 1982 to 2007, more than half (51% to 60%) of all U.S. patents were of U.S. origin.

Europe is quick to brag about its health care system compared to the U.S.  Europe simply buys the drugs that we in the U.S. paid to develop.  According to Health Affairs:

Country-level analyses for 1993-2003 indicate that U.S. firms overtook their European counterparts in innovative performance or the introduction of first-in-class, biotech, and orphan products. The United States also became the leading market for first launch... It is striking that the United States accounted for 68 percent of first-in-class launches, 45 percent of biotech launches, and 69 percent of orphan launches after 1993.

There was a real "Green Revolution," but it wasn't "green" energy; it was things that are truly green -- things that grow and that we can eat.  The Green Revolution, born in the U.S., is credited with saving a billion people from starvation.  The U.S. grows enough to feed itself and still export another 10% to 30% for the rest of the world.  Only about 2% of us use about 2% of the land to feed 120% of us.

With the U.S. defending it, Europe is free to foster its "cuddly capitalism."  After the U.S. innovates something, Europe can copy it.  It copies our agriculture, our drugs, our health care, our aerospace, almost everything.  In return, we got the Beatles, Abba, and IKEA.  Oh, and World Wars I and II.

We already do spread our wealth.  Even the oil-rich countries are rich because the U.S. developed the technologies for finding that oil, getting it out of the ground, refining it, distributing it, and using it.

And for all this we don't even demand a "thank you," much less tribute.  No, all we want are two things: (1) don't kill us, and (2) let us buy and sell with your people at prices they agree to.  That's how bad we are.

Once the U.S. completes its transition to becoming just another European country, who will be the new U.S. off whom we all get to freeload?  No one.  We are the Golden Goose.  Kill us, and the whole party is over.

That's the big fly in the ointment of thinking we in the U.S. can just copy Europe's cuddly capitalism.  Ronald Reagan said it better, almost 50 years ago.

You and I have a rendezvous with destiny. We will preserve for our children this, the last best hope of man on Earth, or we will sentence them to take the last step into a thousand years of darkness.

Those weren't just words.

Randall Hoven can be followed on Twitter.