What makes America great?
The standard answers point to qualities that the United States is said to have in greater abundance than its peers in Europe and Japan. There are the innovations that pour out of Silicon Valley companies and elite universities, the flexibility of a work force relatively unconstrained by union rules, the dynamism of entrepreneurs less hamstrung by an oversize welfare state and of a more mobile population willing to move to where the cutting-edge jobs are mushrooming.
In short, the standard innovation theory of American exceptionalism is all about qualities that make each worker more productive. Today, nearly all the economic discussion about how to make America great again focuses on ways — like cutting red tape and taxes — to revive flagging productivity growth.
Though this discussion remains critically important, it plays down a big shift in the story. The underlying growth potential of any economy is shaped not only by productivity, or output per worker, but also by the number of workers entering the labor force. The growth of the labor force is in turn determined mainly by the number of native-born and immigrant working-age people. Over the last two decades, the United States’ advantage in productivity growth has narrowed sharply, while its population advantages, compared with both Europe and Japan, have essentially held steady.
What makes America great is, therefore, less about productivity than about population, less about Google and Stanford than about babies and immigrants.
The growing importance of the population race will be very hard for any political leader to fully digest. Every nation prefers to think of itself as productive in the sense of hard-working and smart, not just fertile. But population is where the real action is.
Comparing six of the leading developed countries — the United States, Germany, Japan, Canada, Australia and Britain — I found that not only has productivity growth been slowing across the board in recent decades, but also that the gaps in productivity growth among these rich nations are narrowing sharply. For example, in the 1990s and 2000s, productivity was growing much faster in the United States than in Germany or Japan, but that advantage has largely disappeared in this decade.
The reasons for this convergence are complex, possibly having to do with the way production technology now spreads quickly across borders. But this trend spans the developed world, and it basically holds regardless of which two countries you compare, which should raise doubts about how any one country, including the United States, can regain a distinct economic advantage by focusing only on reviving productivity.
Which brings us back to babies and immigrants. Like productivity, population growth has been slowing worldwide in recent decades, the big difference being that the gaps among the rich nations are increasingly significant. In the 1960s the United States population growth rate averaged 1.2 percent, or 50 percent higher than Europe’s and about the same as Japan’s. By the late 1960s, population growth peaked worldwide because of the spread of birth control and other cultural shifts, but it has slowed much more gradually in the United States than in its rivals.
In the past decade, American population growth has averaged 0.8 percent a year, eight times faster than Europe’s, and Japan’s population has not grown at all. Increasingly, then, the underlying difference between the fast- and slow-growing economies is explained more by the differences in population growth than by productivity. And the United States now relies more than ever on demographics to defend its economic power. In the past decade, population growth, including immigration, has accounted for roughly half of the potential economic growth rate in the United States, compared with just one-sixth in Europe, and none in Japan.
Since 2005, per capita gross domestic product has grown on average by 0.6 percent a year in the United States, exactly the same rate as in Japan and virtually the same rate as in the 19 nations of the eurozone. In other words, if it weren’t for the boost from babies and immigrants, the United States economy would look much like those supposed laggards, Europe and Japan.
Indeed, if the United States population had been growing as slowly as Japan’s over the last two decades, its share of the global economy would be just 15 percent, not the 25 percent it holds today.
Moreover, immigrants make a surprisingly big contribution to population growth. In the United States, immigrants have accounted for a third to nearly a half of population growth for decades. In other countries with Anglo-Saxon roots — Canada, Australia and Britain — immigrants have accounted for more than half of population growth over the past decade. Those economies have also been growing faster than their counterparts in the rest of Europe or Japan. But much of that advantage would have disappeared without their population advantage.
Politically, the irony of this moment is stark. Population growth is increasingly important as an economic force and is increasingly driven by immigration. Yet now along comes a new breed of nationalists, rising on the strength of their promises to limit immigration. And they have been especially successful in countries where anti-immigrant sentiment has run strong, including the United States and Britain.
Immigration has been expanding the United States population at a rate of about one million people a year over the last decade. It’s not clear exactly how much President Trump’s policies will reduce the net flow of immigrants, given that he has yet to articulate a broad-based immigration program. Prime Minister Theresa May of Britain has been more explicit, promising to cut the net inflow to the “sustainable level” of under 100,000 immigrants a year, down from an average of 250,000 in the last decade. For these leaders, delivering on these anti-immigrant messages may now be politically imperative, but it will seriously handicap their economies in the global growth sweepstakes.
History is littered with examples of emerging nations that have failed to generate enough jobs for a booming young population. But virtually no nation has ever sustained rapid economic growth without strong population growth. And at a time when every major country including the United States faces continued decline in population growth, workers are an increasingly precious source of national economic strength.
In the long run, governments have limited avenues to increase the growth rate of the labor force, which is unaffected by short-term fluctuations in unemployment. Even enticing the “forgotten men” — those no longer looking for work — back into the labor force can have only limited impact. The main reason fewer Americans participate in the labor force is not because they are discouraged, but because they are getting older.
In recent decades nations from Australia to France to Singapore have foreseen the looming economic impact of slower population growth, offering families “baby bonuses” to have more kids — but typically with little impact on the birthrate or the economy. The impulse to procreate may be one of the few areas of human endeavor that remains beyond the reach of government mandarins. In contrast, regulating immigration remains a relatively simple task, and if immigrants are properly assimilated, they can have an immediate impact on the size of the work force.
It would be unrealistic to imagine that hard economic logic will turn the anti-global, anti-foreign tide any time soon. So the likely result is that the United States and Britain will go ahead and limit immigration. To the extent they do — and their rivals do not — they will undermine their key economic edge, and cede much of the growth advantage they have enjoyed over Europe and Japan.