Ever since the Reagan boom of the 1980s, many elites outside the United States have been telling Americans that they have been hoodwinked – that cutting taxes and regulations is a reckless, unnecessary way to spur growth. Countries that provide generous childcare subsidies and wrap businesses in reams of red tape still enjoy equivalent incomes, the argument goes. So why put up with a rugged, muddy cowboy economy?
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Two reasons stand out. First, over the past 10 years, US income growth has left countries like Canada and Germany in the dust – registering a gap of about 20 per cent in some cases. And the equity markets tell a similar story, with the S&P 500 enjoying double the gains of the rest of the Group of Seven’s markets.
The second reason is that Europe, and a good part of the wider world, has been a free rider, hitching its wagon to the US cowboy economy.
The Trump administration likes to focus on defence, bemoaning Europe and South Korea’s failure to pull their weight. But there’s more to this argument than the statistics showing that the US spends 3.5 per cent of gross domestic product (GDP) on its military, compared to, say, Austria’s 0.8 per cent or Norway’s 1.6 per cent. So not only are Norway’s fiords and the Alps in neutral Austria safer because of American gunslingers, such protection also frees up more money to spend lavishly on schools and healthcare.
Moreover, despite hefty defence spending, the US funds the world’s medicine cabinet. With less than 5 per cent of the global population, it accounts for half of all pharmaceutical research and development spending. By contrast, the UK invests just 0.28 per cent of its GDP in new medicines, about a third of the US share.
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Then, when firms shout “Eureka, we’ve found a new cure!” America’s light-touch pricing regulations allow companies to recoup massive R&D costs from American families. But when Swedes and Belgians get breakthrough drugs – whether for epilepsy or migraines – American consumers end up paying 2.5 times as much. Without the free riding, hundreds of drugs would not make it from the test tube to the medicine cabinet. US households pay the price to spark new discoveries.