THE DESTRUCTION OF AMERICAN COMPETITIVENESS

WHOM THE GODS WOULD DESTROY, THEY FIRST MAKE THEM MAD

“Hey, Jack. It’s incredible how fast the market expectations of the American economy have changed since The Prince took over the Presidency. It has become a roller coaster after a long period of healthy productivity growth and price stabilization.

“But, Pere, lately the roller coaster only goes down…This is becoming pretty bad…I remember what The Prince said in October 2024 at a rally. He said Biden’s policies were a disaster that only he could fix.

“How ironic that the disastrous policies would be his.”

“I don’t think he could understand why,” said Jack. “In that rally, he said the following:

<“We will begin a new era of soaring incomes. Skyrocketing wealth. Millions and millions of new jobs and a booming middle class. We are going to boom like we’ve never boomed before.””>^[1]

“Sit down, Pere. I prepared some notes about the economy because I knew you would want to talk about it.”

STATE OF THE ECONOMY UP TO TRUMP’S ELECTION

“I identified four themes: productivity and growth, price stability, quality of life, and debt, and then I compared Biden with The Prince.

Productivity and Growth

“Regarding productivity growth, Mario Draghi delivered a report in September 2024 to the European Commission comparing the performance of the American and European economies during the current century. Based on his research and that of others, Draghi showed that the United States economy had grown 20% more than the EU economy since 2000, based on sheer productivity increase, which is the healthiest source of growth.

Price Stability

“The economy also looked on a healthy track regarding price stability. In the opinion of J. P. Morgan, published in early October 2024:

<” The September 2024 Consumer Price Index (CPI) rose by 0.2% month-over-month (MoM) and 2.4% year-over-year (YoY), slightly higher than expected, but cooled from the 2.5% YoY rise in August. This marks continued progress toward the Federal Reserve’s (Fed) 2% target… The uptick in core inflation reminds us that the path to the Fed’s 2% target may be bumpier than expected, but doesn’t change our view that inflation is well on its way to 2%.”>^[2]

Growth and Quality of Life

“Growth, however, was not translating into a comparable improvement in the American quality of life. As the title of a New York Times article summarized, “The U.S. Economy is Racing Ahead. Almost Everything Else is Falling Behind. The gap between American’s prosperity and quality of life has grown since the 1990s.”^[3]

“This article was based on an assessment made by “a politically diverse group of scholars—who together have advised every president since Bill Clinton and who work at many of the country’s top think tanks.”

The report begins by confirming Draghi’s findings.

<”In 1990, per capita gross domestic product in the U.S.—the total value of the country’s output, divided by the number of residents—was only 28 per cent higher than in the euro area. The gap is now more than 80 percent…Yet comparisons in most other realms make the U.S. look much worse…

<” This country has the lowest life expectancy of any rich country, which was not true for most of the 20th century. The U.S. has the highest murder rate of any rich country and the world’s highest rate of fatal drug overdoses. It also has one of the lowest rates of trust in the federal government and among the highest rates of youth depression and single-parent families. When Americans are asked how satisfied they are with their lives, the U.S. ranks lower than it did three decades ago”>

“From 1999 to 2022, the United States has fallen relative to other high-income countries in most other indicators: employment formation (falling from position 10 to 13); in child death rate (from 23 to 33); murder rate (31 to 33); suicide rate (13 to 33); drug death rate (36 to 39); social isolation (2 to 10, from less to more isolated); trust in other people (6 to 7); air quality (6 to 8); press freedom (1 to 3); and trust in the federal government (20 t0 34). There are two other indicators where the United States has improved relative to other high-income countries: voter participation (from position 12 to 8) and belief in democracy (12 to 8). The country has maintained position 4 in average years of education.

“Other problems mentioned by the economists seemed to be contradictory. One is increased inequality. As mentioned by Joseph Romm of the University of Pennsylvania, “The strong economic performance has principally provided gains for the wealthiest 10 percent.” The other problem is, contradictorily, affluence. Anna Lembke, a Stanford University psychiatrist, said. “In this world in which everything has been more potent, more accessible, more novel and more bountiful, we’re prone to overconsume and make ourselves sick.” This problem could not have worsened in a society where only the wealthier 10% saw their income improving. The increasing indebtedness of the population and the government may explain this contradiction. Part of the consumption might have been funded by borrowing.

The Growing Debt

“This particular group of economists did not mention the growing debt, but it has been a source of concern for many others—and with reason. The federal debt has increased at an unsustainable rate in the last two administrations. In his first term, President Trump approved $8.4 trillion of net ten-year debt (of which $6.5 trillion was bipartisan, approved by the two parties). In comparison, President Biden approved $4.3 trillion (of which $1.3 trillion was bipartisan).^[4]

“Due to these borrowing volumes, the Federal debt more than doubled as a percentage of GDP, from 54% in 2000 to 120% in 2024.^[5]

“The average total consumer household debt has also increased substantially this century. By 2022, the median income was $56,368 (half of the households had a higher income and half a lower one), and the average household debt load was $101,915.^[6] According to the New York Fed, the overall household debt increased from $8.9 trillion in 2004 to $18.0 trillion in 2024, of which 72% was due to housing.^[7]

Summary

“The American economy had grown quite healthily, led by increasing productivity. Also, though inflation had not gone down to the Federal Reserve target, it was coming down to it. Yet, there were two sources of concern. First, the population’s quality of life was not increasing as the growth of the economy would have suggested. This was a severe problem because it caused widespread discontent. Second, the private and government debts were growing at unsustainable rates as a percentage of GDP. This evidenced that domestic demand grew faster than domestic production, causing large trade deficits and introducing inflationary pressures. The ultimate cause of excess demand was the large fiscal deficit that had prevailed for many years.

“These problems required action, first integrating the entire society in the success story of growth and then reducing fiscal deficits—two tasks that could be seen as contradictory unless the efficiency of social expenditures was substantially increased. Also, since lowering the fiscal deficit would reduce domestic demand growth, expanding exports was necessary to sustain economic growth, which required further productivity gains and maintaining an environment favorable for international trade.

This was a relatively easy task for the United States, which had the world’s largest and most diverse commercial and financial networks and the most efficient global supply chains. These enormous networks and local economic freedom turned the United States into the world’s most flexible economy because it had access to all the global resources to use them in any place on earth. Connected everywhere, trading and combining productive forces with anybody, it was the center of the world economy. Its companies increasingly concentrated on design, creativity, and logistics, which allowed them to gain by producing the highest value added (the fruits of knowledge) and allocating the other activities to the places where they could be produced with the lowest cost. This global access was the ultimate cause of the high and increasing productivity of the United States.

This organization was the product of the market freedoms prevailing in the United States. Apple, Nvidia, Google, and all the companies now leading the economy adopted this model—produce knowledge in the United States and simpler material things abroad—not because they are stupid. It maximizes the country's gains by concentrating its capital and labor force in the most productive activities that generate the highest value added.

TRUMP’S PERCEPTION OF THE PROBLEM

“Donald Trump, the model for The Prince, a character in the novel we are writing, had a different perception of the economic situation. He promised higher rates of economic growth, which had been satisfactory, and ignored the problem of extending the benefits of such growth to most of the population. Though he didn’t mention it in this quote, he said he was conscious of the need to reduce the fiscal deficit. However, as many economists noted, his proposed programs would result in higher deficits than those produced by Kamala Harris’s projects.

“This didn't sound good. Yet, the implementation of his proposals has been even worse. Doubtlessly, they have proven to be the worst ever applied in the United States. The sources of these problems are not just the economic measures themselves but also their application within a disastrous mixture of economic and non-economic measures.

THE DESTRUCTION OF THE AMERICAN COMPETITIVE ADVANTAGES

Killing the Market Model

“Now, The Prince wants to reverse the free-market model. Rather than having the market define the best way of organization, he prefers having himself defining what American companies will produce (everything, including old industrial products with low value added) and where (everything in the United States, including the low-value added ones that would require hiring workers at very low salaries to be profitable). Replacing the market with a politician as the agent in charge of managing production and consumption is not a good idea. History has proven it causes inefficiencies and corruption because producers stop paying attention to their competitiveness to maximize their profits when they realize they can more easily maximize them by kowtowing to the politicians. This may be more practical for producers but disconnects profits from productivity. This eliminates one of the great advantages of the United States: its reliance on higher efficiency to produce profits. It is only when this connection exists that profits and growth are linked.

“To force this return to low-value-added, The Prince discovered an old mechanism: import tariffs. He then (mistakenly) thought they would allow him to increase tax revenues by taxing foreigners, which he could use to fund a tax reduction to the billionaires. Knowing this would not be enough, he thought he would reduce social expenditures and foreign assistance.

“The theory behind this idea is that if the cost of producing a table in the United States is $120 and in Thailand (including transportation) is $100, all production will go to Thailand. Yet, if you impose a 20% tariff on tables, the Thai and the American tables would compete on equal conditions in the American market. The two could be sold at the same price. If, however, you impose a tariff higher than 20%, all production of tables purchased in the American markets would be transferred to the United States. The Prince thinks this is an excellent idea because, first, no more tables would be imported, so that all tables would be produced locally; second, the government would receive $20 per imported table, which will deliver enormous flows of funds toward the government; and, third, these taxes would be paid by foreigners, not the locals.

“By this moment, you surely feel he is counting the tables twice. You cannot collect taxes on tables you don’t import. Also, you notice that he is dead wrong in believing that, in any case, the tariffs would be paid by the foreign sellers. They are paid by the locals when they buy the table. Moreover, while tariffs do not generate inflation (a continuous increase in prices), they increase the prices of tables when introduced.

“Seeing a Soviet-liking extreme leftist proposing that he, himself, will decide who will make money and who will not, and in what measure, should not surprise anybody. Seeing somebody who poses as the defender of liberal democracy and capitalism making the same proposal is surprising. Even more astonishing is finding supporters of these ideas among people like the Republicans, who portray themselves as the true believers in freedoms, so intensely so that they need a different word to describe themselves: libertarians. When seeing this, you suspect hypocrisy. They want to be close to the Prince to get benefits from the government.

“If you want to taste this perception, watch the inauguration videos or see Elon Musk in action daily while thinking of his conflicts of interest.

Killing Human Capital

“The essence of the emerging world is the knowledge economy. Being oriented to multiply the power of the mind, the new technologies privilege knowledge, the ability to think and coordinate and organize groups of equals, and creativity. As shown in the most successful enterprises of our day, knowledge and human skills have become the crucial factors of production. While most of the capital of the great industrial enterprises of the twentieth century was embedded in physical assets, the capital of the new enterprises is almost entirely embedded in human beings, and it is not by chance that all of them are located close to great learning centers. The great generator of value added is the educated human being.

“The Prince does not realize this or does not care. One of his most important priorities has been to cut government expenses in education and health, the two essential components of human capital. Cutting those services is equivalent to destroying the factories producing the wealth of the future. The negative consequences of doing this are unfathomable in terms of economic development, social cohesion, and political stability. The people who voted for him will eventually discover that this was the solution to their being left behind by the technological revolution and that The Prince did that to reduce wealthy people's taxes. Having tried the Democrats and now the Republicans, only to find that they do nothing for them and their families, will unleash the worst of all ideas: that liberal democracy cannot provide a solution for them. This is what happened in the 1920s and 1930s in the countries that became the destructive communist and Nazi regimes.

Introducing Arbitrariness

“A social order needs permanent elements, characteristics that do not change even if everything else does. This set of permanent elements gives identity to a society and, more importantly, lends an essential predictability to its behavior. Growth and change need those permanent elements to flourish. Stable connections between the past and the future are critical to determining if it is worth investing in today to get benefits in the future. This is true not just economically but in every other aspect of life. To build on top of an existing infrastructure makes sense only if such infrastructure is to last. What is the use of a social order if it is not stable, if one cannot be sure it will last?

“We have a fundamental contradiction. Institutions must restrict individual behavior to introduce predictability while allowing freedom to satisfy people’s craving for growth. Resolving this contradiction is the key to creating a stable society.

“Examining the solutions that different societies have found to this conflict between predictability and social change allows us to determine the difference between healthy absorption of rapid change and fields of behavior that produce an unstable and destructive equilibrium.

“Nothing is more destructive than being subject to the commands of an arbitrary ruler. To simulate an arbitrary ruler, think of The Prince deciding to impose tariffs to obtain objectives in every dimension of government policies, not necessarily linked to any economic activity. Imagine your life managing a company producing complex products with many inputs subject to tariffs that could be modified for any reason at any moment—like, for example, to force Canada to become a state of the United States, or to block the sales of some imported materials in your territory, or to twist the arm of another country to receive prisoners you don’t want to have in your territory. Any of these decisions will change your production costs, purchasing policies, investment needs, etc. Now think that one day you are told all Canadian and Mexican products will pay 25% tariffs, and then that this measure is postponed four days, and then thirty days, and then that yes, they will be applied, and then that some American car companies will be exempted, and then that all companies formally established in the country will not, and so on, and on…

“This could be a funny idea for a film like Charlie Chaplin’s The Great Dictator, but it is a killer of investments.

Killing the National Character

“As the stock markets crashed recently, The Prince did not want to discard the possibility of a recession, saying this would be just a passing adjustment. But what he is doing will cause something much worse than a temporary disequilibrium. He is rapidly destroying several core competitive advantages the United States had accumulated through centuries—those associated with the national character—which he has thrown by the side for imaginary gains.

“It is common to think that nations' competitive advantages depend exclusively on economic factors, such as labor and capital costs and the volume and quality of natural resources. Yet, many countries have low costs and abundant resources of good quality and still do not develop into prosperous economies. Underlying all the economic factors, there is a layer of features in the people that empower them to use all these resources to great advantage. These features constitute the character of a nation.

“By the time of Independence, the citizens of the United States had already developed a distinctive character that inspired trust among locals and strangers. That character became the foundational stone of the new country, built from the strongest material.

“Now, The Prince and his friends are destroying these legacies through their actions, domestically and globally, betraying allies, trampling on the international rule of law by demanding territories from Canada, Denmark and Panama, in the same way and with the same language as Nazi Germany, and with so many actions that it is impossible to summarize in entire books.

“The United States has become predatory.

Destroying the Great Network

“All these actions—the proud negotiation of values and principles in exchange for physical assets, the betrayal of old allies who shed blood in terrible battles, the contempt for the smaller nations, the unbridled hubris—are contemptible in themselves. They are also stupid because they also destroy another legacy left by the Founding Fathers that has been proudly maintained, generation after generation, for 250 years and has been one of the sources of the wealth of the United States, its global prestige, which is the basis of the huge network of commercial, financial, military alliances and the foundation of the institutional setting that supports the global order. Destroying the moral foundations of such order is equivalent to killing that order. Eventually, it must be restored, but the United States will no longer be a part of it. Would they realize that they are betraying their Founding Fathers?”

Pere felt depressed.

“Are you surprised that the markets have gone down?,” he asked.

“Not at all,” said Jack.

. “I hope they wake up on time to prevent all these consequences,” said Pere.

…..

Manuel Hinds is a Fellow at The Institute for Applied Economics, Global Health, and the Study of Business Enterprise at Johns Hopkins University. He shared the Manhattan Institute's 2010 Hayek Prize. He has worked in 35 countries as a division chief and then as a consultant to the World Bank. He was the Whitney H. Shepardson Fellow at the Council on Foreign Relations. His website is manuelhinds.com

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^[1] Quoted by Heather Cox Richardson in Letters from an American, March 10, 2025,

^[2] Cristina Dwyer, “September 2024 CPI report: Inflation fell to 2.4%, moving closer to the Fed’s 2% target, J.P. Morgan Wealth Management, October 11, 2024, https://www.jpmorgan.com/insights/outlook/economic-outlook/cpi-report-september-2024#:~:text=The%20September%202024%20Consumer%20Price,(Fed)%202%25%20target.

^[3] David Leonhardt (graphics by Ashley Wu), “The U.S. Economy is Racing Ahead. Almost Everything Else is Falling Behind. The gap between American’s prosperity and quality of life has grown since the 1990s.” The New York Times, February 4, 2025, https://www.nytimes.com/2025/02/04/briefing/the-us-economy-is-racing-ahead-almost-everything-else-is-falling-behind.html?searchResultPosition=1

^[4] US Budget Watch 2024, Trump and Biden: The National Debt, June 2024, https://www.crfb.org/papers/trump-and-biden-national-debt

^[5] Federal Reserve Bank of St. Louis, FRED, March 4, 2025, https://fred.stlouisfed.org/series/GFDEGDQ188S

^[6] Debt.org, December 2023, https://www.debt.org/faqs/americans-in-debt/demographics/

^[7] Federal Reserve Bank of New York, Household debt and credit report, Q4 2024, https://www.newyorkfed.org/microeconomics/hhdc