🗽💨 America is outgrowing other rich countries, thanks to the ‘American Tailwind’

A favorite Warren Buffett phrase come into play as the US economy lengthens its lead since the pandemic

Super-Short Summary: The American economy has demonstrated remarkable resilience compared to other advanced economies in the aftermath of the COVID-19 pandemic. Many countries have experienced a prolonged economic scarring that the US has managed to avoid. This success can be attributed to a combo of factors, according to a new Fed study, including larger budget deficits, a lower impact of interest rate changes on borrowing costs, a more flexible labor market, and a significant increase in new business formation, especially in the high-tech sector. The unique advantages and opportunities offered by the American economy, coupled with its deeply ingrained culture of innovation and entrepreneurship — Warren Buffett’s “American Tailwind — provide reason for Up Wing optimism.

During the pandemic, there was a lot of irresponsible chatter — some from America's foreign adversaries and some from gullible people here at home — declaring that America had become a failed state, the American Project a failed experiment. Good grief. (I suppose it's this kind of sentiment that motivates creative individuals to produce a Down Wing film like Civil War.) Whatever the ideological and psychological sources of that impulse, genuinely believing and expressing the notion that America has failed requires willfully ignoring evidence to the contrary.

Some of that evidence can be found in “Why is the U.S. GDP recovering faster than other advanced economies?,” a new Federal Reserve research note from Francois de Soyres, Joaquin Garcia-Cabo Herrero, Nils Goernemann, Sharon Jeon, Grace Lofstrom, and Dylan Moore. As the economists explain:

Economic performance since the onset of the COVID-19 pandemic has been very heterogeneous across countries. While real GDP in the U.S. has already returned to its pre-pandemic trend, advanced foreign economies (AFEs) experienced a much weaker recovery, both relative to the U.S. and to their own pre-pandemic trend. In some countries, the gap between real GDP and its pre-pandemic trend has kept widening, suggesting continued scarring from the crisis as well as some new headwinds.

(The researchers calculated output losses by comparing actual real GDP to pre-pandemic trends. The red numbers indicate output loss four years after the recession's start, serving as a measure of the pandemic's scarring effect on GDP. For comparison, they also included output loss during the Great Financial Crisis.) 

To reiterate: “... the U.S. has completely offset its output loss as of 2023: Q4, meaning that its level has returned to its pre-pandemic trend. The GDP effects of the pandemic appear to have been temporary, without any longer-run scarring.”

So what are the possible factors driving the “stark difference” in economic performance between the US and those other rich economies? The report identifies five causes to consider, though there’s one I’m going to give a bit more attention to:

• First, the US ran larger budget deficits than other advanced economies during the COVID-19 crisis and recovery, which may have contributed to its stronger economic performance. But the causal link is weak, suggesting other factors were more important. Moreover, a country's higher government spending can boost economic activity both domestically and in other countries through trade.

• Second, the impact of changes in central bank interest rates on consumer and business borrowing costs has been smaller in the US compared to other advanced economies. One reason why: The US has a higher share of fixed-rate mortgages and corporate loans, meaning that interest rates on these loans don't change as quickly when the Fed starts a tightening cycle.