Month: May 2025

The US economy has emerged from the pandemic growing at a faster pace than the UK and other high-income countries. Simon Pittaway tackles the question of why in “Yanked away: Accounting for the post-pandemic productivity divergence between Britain and America” (Resolution Foundation, April 2025).

The average standard of living in any economy, over time, will be determined by the productivity of workers in that economy. This figure calculates productivity as GDP/worker, adjusted so that productivity in all the G7 countries just before the pandemic was equal to 100. (The G7 countries are the US, UK, France, Germany, Italy, Japan, and Canada.) You can see the red US line pulling ahead of the rest. The official British data is the dashed line, but Pittaway argues that the official data is too optimistic, and the actual labor productivity in the UK is actually lower than it was in 2019.

When you trace the productivity patterns deeper into the data, what do you find? For the UK, Pittaway points to several industries where the decline in productivity since 2019 has been especially high.

For example, it appears that the UK health care sector is experiencing an outright decline in productivity. In the UK oil and natural gas sector, employment is up slightly, although production of oil is down by two-fifths and production of natural gas is down by three-fifths. There seems to have been a decline British productivity in wholesale and retail trade, as well–that is, output in the industry is down much more than employment. Here, I want to focus on a few bigger-picture issues.

One is the level of investment. Pittaway writes:

The investment gap between Britain and America has widened in recent years. Investment by British businesses hit a brick wall around the time of the Brexit referendum.42 As a result, growth in Britain’s capital stock has slowed by two-thirds, from 2.8 per cent in 2016 to 0.9 per cent in 2023. Notably, this slowdown has been particularly stark in the service sectors where the US has significantly outperformed the UK. In real terms, American businesses in those sectors invested 24 per cent more in 2023 than in 2016, while their British counterparts invested only 7 per cent more.

Back when Brexit was happening, I wrote that, as an American, I understand the urge to break trade ties and declare independence. But whatever the merits of Brexit as a cry for self-determination and national autonomy, it wasn’t good for investment incentives. The current US push to fracture trade ties with the rest of the world, especially as it is happening in unclear and ever-evolving ways, won’t be good for US investment incentives, either.

A second big difference worth noting is the US productivity growth advantage in technology-using jobs. US firms are investing more in technology, in particular. As a result, productivity growth in service-related has been higher in the US economy. Pittaway writes:

Professional services emerge as a particularly important source of productivity growth in the US. In part, this reflects the rapid growth of America’s large, high profile tech companies, who mostly operate in the information and communications sector. But productivity growth in professional services sectors that use rather than produce tech has been more consequential. Between 2019 and 2023, professional, scientific and technical services accounted for one-sixth (17 per cent) of the post-pandemic gap in productivity growth between the US and the UK – twice as much as the tech (ICT) sector (8 per cent). The additional tailwind from faster productivity growth in less glamorous service sectors – like administrative and support services, wholesale and retail, and hospitality – shouldn’t be overlooked. For example, different rates of productivity growth in the wholesale and retail sector account for almost as much of the US-UK aggregate productivity growth gap (0.51 percentage points) as information and communications.

A third difference is that energy costs are much lower in the United States than in the UK, or in other countries across Europe. The left-hand panel compares the price of natural gas; the right-hand panel compares the price of electricity.

Finally, the US economy seems to have emerged from the pandemic with a rise of dynamism: more new companies being started, more economic shifts toward areas of greater economic opportunity. Here’s a figure illustrating one aspect of that pattern. As you can see, company births and deaths in the US spiked during the pandemic, but company births have remained high since then. There’s no such movement in the UK data.

During the pandemic, many European countries focused on preserving the connection between workers and their jobs, while the US focused more on income protection for workers, but without linking that aid to remaining with their previous employer. One consequence of those different policy choices is that the US economy has been more fluid in adjusting since the pandemic.

Fertility rates are falling around the world, but Republic of Korea is the outlier, with a fertility rate of 0.72 in 2024. The International Monetary Fund, in its report on Korea’s economic situation (generally quite good), thought that Korea’s low fertility justified adding an “Annex” to its most recent report on Korea’s economy: “Addressing Korea’s Declining Labor Force” (IMF Country Report No. 25/41, Republic of Korea, 2024 Article IV Consultation, February 5, 2025).

This figure puts Korea’s fertility rate in perspective. You can see that the US fertility rate is a little above the average for the OECD countries (mostly the high-income countries of the world). Countries with low fertility rates include Spain, Italy, and Japan. But even among the nations with low fertility rates, Korea is a clear outlier.

As the report notes: “According to the UN’s population projection, Korea’s population is projected to decline by 17 million (equivalent to 33 percent of its current population) by 2070. The working-age population, which peaked in 2019, is projected to decline to 36.3 million (70.2 percent of total population) in 2024; 34 million (66.4 percent) in 2030; and 16 million (45.8 percent) in 2070. This decline is putting considerable strain on labor supply and hence potential growth of the Korean economy.”

Let me just empahasize that opening line again: with a fertility rate of .72, Korea’s population will fall by one-third in less than a half-century. Setting aside extreme conditions of war, disease, famine, and oppression, I do not know of any country which has gone through such an experience.

To see this another way, the top figure shows Korea’s population by age group in 2023. As you can see, the young age groups are quite small compared to the middle age groups. The bottom figure than projects out these trends to 2070. At that point, the middle age groups are small compared to the elderly. Also, if you look at the figure more closely, you will see that the horizontal axis in 2070 is different from the figure in 2023, so the decline in the size of the bars is even larger than it might at first appear.

Discussions of fertility can have a high emotional charge, because they sometimes can sound as if the policymaker (or the innocent writer) is telling people–and women in particular–how many children they “should” have. It’s a legitimate concern. But choices about children are heavily affected by other factors: cost of housing and schools, flexibility of workplace arrangements, availability of childare, structure of labor force, and more. In Korea, these other factors tend to lean against having children.

Consider some of these factors:

Housing costs. The IMF notes: “As of 2024Q1, it is estimated that median income families spend about 63 percent of household income for loan repayment of a median-priced home. The ratio is notably higher in the Seoul Metropolitan Area (151 percent), where the best jobs and education institutions are concentrated, and for larger living spaces needed to raise a child (153 percent for a property bigger than 135 square meters).” Payment of this size pretty much define “unaffordable.” (For those who don’t read metric, 135 square meter is about 1200 square feet; that is, a typical size for a two-bedroom apartment or condo.)

The centrality of private tutoring for children. Mothers in Korea are often expected to oversea a regime of private tutoring, which is seen as necessary to gain entry to prestigous univerisities. The IMF: “Korea’s high private tutoring participation rates largely reflect fierce competition to enter prestigious universities. … A significant portion of parent’s income is thus spent on private tutoring. In 2023, 78.5 percent of Korean primary and secondary school students took private tutoring (Ministry of Education, 2024). Monthly average expenditure for private tutoring per student relative to household disposable income has increased sharply since 2015, reaching … roughly 10 percent of average household disposable income in 2023. Empirical analysis suggests that prevalence of private tutoring is negatively associated with country-level total fertility rate …”

A dual-structure workforce. Korea’s labor market has what is called a “dual structure,” which means that one set of jobs are highly paid, highly demanding, seniority-based and often quite secure, while the remaining jobs are less well-paid, with limited promotion prospects, and often insecure. Thus, a mother in Korea will have a very hard time remaining on the highly-paid track–and in a dual-structure economy, once you are off the highly-paid track, it is very difficult to re-enter that track. Here’s a figure showing flexibility of working arrangements. The US ranks near the top; Korea is near the bottom.

This figure illustrates the dual labor-market in Korea by showing that temporary and self-employment in Korea are especially high in comparison to other countries.

Although the IMF report doesn’t mention this point, it also seems relevant to me that the tradition in Korea has been for a married couple to move in with the husband’s family, which has often meant that the wife end up doing household tasks with her mother-in-law. This pattern has become less common over time, but the possibility of such a living arrangement seems likely to discourage marriage and child-bearing for at least some women.

The IMF report goes into detail about how various policy steps could offset Korea’s low fertility rates, at least to some extent. I should also add that the dangers of extrapolation apply here with some force: If Korea’s population and workforce decline with the speed of these predictions, then in the next few decades housing should become substantially more affordable, admissions at major Korean universities will be less selective, firms will be under pressure to be more flexible in their workforce, and so on. As the US experienced after World War II, baby booms are possible, too. Decisions about how many children you “want to have” are not made in a vacuum.

US investors put money in assets of other countries, including “portfolio investment” which focuses on ownership of stocks and bonds without a management interest, and “foreign direct investment” which is owning enough of a foreign company to have a management interest. Conversely, foreign investors put money into US dollar assets in the US economy. Erin Whitaker and Tiffany Dang of the US Bureau of Economic Analysis put togethere the most recent data in “A Look at the U.S. International Investment Position: Fourth Quarter and Year 2024” (Survey of Current Business, April 7, 2025).

Here’s the overall picture. Just to be clear, “U.S. Assets” does not mean assets owned by the US government, but instead is the foreign assets owned by all US firms and individuals. Conversely, “U.S. Liabilities” does not mean that this is a debt owed by the US government. Instead, it is the sum of the assets that what foreign investors–private and public–own across the US economy. Also, notice that the vertical axis here is being measured in trillions of dollars: for perspective, total US GDP in 2025 will be about $28 trillion. We are talking about substantial amounts here. The gap between US assets and US liabilities was about $7 trillion back in 2015, but is now about $26 trillion.

Clearly, US liabilities exceed US assets, and the gap is growing. What are the implications of that fact in practice? To get a grip on these issues, first look at a breakdown of these assets and liabilities: first the US ownership of foriegn assets and then the foreign ownership of US assets.

There are several ways that these totals for assets and liabilities can change over time. If the US stock market goes up, for example, then the assets of foreign investors in the US stock market also rise in value. Indeed, the primary reason why “US Liabilities” have risen so sharply, and why the gap between US assets and liabilities has increased so much, is that the US stock market has been rising much faster than foreign stock markets, and the value of holdings of US assets by foreign investors has risen accordingly.

Other factors make a difference as well. All the figures here are expressed in dollars, so in figuring out that the foreign investments of US investors are worth, there has been an exchange rate conversion–and shifts in exchange rates will affect the total US assets.

In some cases, assets owned in another country involve a near-term financial payments; for example, if a foreign investor owns US Treasury bonds, the investor will be paid interest on those bonds. However, if a foreign investor owns stock in a US company that doesn’t pay dividends, the value of that stock can rise and fall without causing a need for a payment to that foreign investor.

I’ll focus here on the returns on direct investments and portfolio investments. As you’ll US investors holding foreign assets have typically earned higher rates of return than foreign investors holding US assets–a situation that the research literature calls “exorbitant privilege.”

Here’s a figure showing the return on direct investments over time, from a different Bureau of Economic Analysis report. The bars show the amounts paid in billions of dollars, as measured on the left-hand axis, while the lines show the rate of return, measured on the right-hand axis. Clearly, what US investors are receiving from direct investments abroad is higher than what foreign investors are receiving.

What about the US return on foreign portfolio investments, and converse, the foreign return on US portfolio investments? Carol C. Bertaut, Stephanie E. Curcuru, Ester Faia, Pierre-Olivier Gourinchas offer new measures of “New Evidence on the US Excess Return on Foreign Portfolios” in a Federal Reserve discussion paper (Number 1398, November 2024). Lookign at data from 2005-2022, they write:

Portfolio returns play an important role in global wealth dynamics. A key stylized fact, first established by Gourinchas and Rey (2007a), is that the return on US external claims consistently exceeds that on US external liabilities, the so-called ‘exorbitant privilege.’ A positive excess return helps to stabilize the US external asset position and makes US current account deficits more sustainable … Our first finding is that the US excess return on portfolio (equity and bond) assets averages a modest 0.5% per year over the full sample. It is significantly higher, averaging 1.7% per year, when we exclude the pandemic period (2020-22).

Looking at the figures above, the foreign portfolio investment in US assets is about $17 trillion higher than US portfolio investment in foreign assets. Using the over-time average of 0.5% per year, US investors would be receiving about $85 billion more each year from their portfolio investments than foreign investors are receiving from their US portfolio investments. If one excludes the pandemic and uses the more common 1.7% difference, the gap in portfolio-related gains would be $289 billion per year.

The fundamental reason why US investors in foreign countries are receiving higher returns is that they are willing to take on more risk. To oversimplify significantly, you can imagine foreign investors putting money into bonds issued by the US Treasury and by big corporation, while US investors are more likely to be seeking out investment with both greater risk and opportunities for growth.

These figures suggest some reorientation of how one thinks about “international trade. As yet another Bureau of Economic Analysis press release reports (February 5, 2025), the US economy had a trade deficit in goods of $1,211 billion in 2024. This number has been the focus of the tariffs that President Trump has announced. However, the US economy runs a trade surplus in trade of services, totalling $293 billion in 2024. (Although the US trade deficit in goods is taken, at least in White House political circles, to be full proof of unfair trade barriers by other countries against US exported goods, the US trade surplus in services, by contrast, has no implications at all as to whether the US is imposing unfair trade barriers in services with regard to US imported goods. Go figure.)

Moreover, payments across borders as a result of direct and portfolio investment also favor the US by several hundred billion dollars. Moreover, I should emphasize that a variety of other payments go into what is called the “current account balance,” the broadest measure that combines international payments related to trade in good and services, as well as foriegn investments, and also includes remittances that immigrants send to their home countries, payments made by foreign insurance companies, payments between governments, and other categories. For those who want the full account of the current account balance, a baseline starting point is “U.S. International Transactions, 4th Quarter and Year 2024.”

How much should Americans worry about the large and growing gap between US assets and US liabilities? Looking back about 20 years, the gap–that is, the “net foreign asset position”–was much smaller: back around 2005, the gap was about 15% of US GDP, while now it’s more than 90% of US GDP. Twenty years ago, the gap was much smaller, so that that when the net foreign asset position became somewhat larger and more negative in a given year, this change was fully offset by the higher returns being earned by US investors holding foreign assets. This was “exorbitant privilege.”

But now, thanks mostly to foreign ownership of US assets and the very strong rise in US stock markets, the net foreign asset position has become enormously more negative at $28 trillion. The rate of return earned by US investors with foreign assets continues to exceed that of foreign investors holding US assets, but that $28 trillion gap is so large that the additional payments received by US investors in a given year no longer cover the increasingly negative net foreign asset position. Thus, Andrew Atkeson, Jonathan Heathcote and Fabrizio Perri have a research paper forthcoming in the American Economic Review called “The End of Privilege: A Reexamination of the Net Foreign Asset Position of the United States.”

As Atkeson, Heathcote, and Perri point out, this fact may alter how you think about the large gains in US stock markets. If US stocks are primarily owned by US citizens, then gains in the US stock market redound to the benefit of Americans. But the rising foreign ownership of US stock markets suggests that gains in US stocks are increasing flowing to foreign investors, instead. International diversification of investments has both gains and tradeoffs.

Tyler Cowen has one of his characteristically wide-ranging “Conversations With Tyler” with “Kenneth Rogoff on Monetary Moves, Fiscal Gambits, and Classical Chess” (April 30, 2025, audio and transcript available). Here, I’ll pass over the comments about the economies of China, Pakistan, Latin America, Japan, the EU, and Argentina, and focus on Rogoff’s comments on the prospects for US debt and for a surge of inflation in the medium-term:

Looking way forward, I would just say we’re on an unsustainable path [for federal givernemtn borrowing]. We will continue to have our debt balloon. Eventually — not necessarily in a planned or coherent way — I think we’re going to have another big inflation soon, next five to seven years, maybe sooner with what’s going on, and that’s going to bring it down just like it did under Biden. It brought the debt down. Then the markets are, fool me once, shame on you. Fool me twice, no, we’re raising the interest rate, and then we’ll have to make choices. …

Last time [during the Biden administration] we probably had a bonus 10 percent inflation over the 2 percent target cumulatively, maybe 12 percent. I think this time, it’ll be more on the order of cumulatively over the 2 percent target, 20 percent, 25 percent. There’s going to be an adjustment. I don’t think the debt is going to be the sole contribution to that. There are many factors. You have to impinge on Federal Reserve independence. Probably, there’ll be some shock, which will justify it. I don’t know how it’s going to play out.

I know that for years, people have said the US debt is unsustainable, but it hasn’t come to roost because we’ve lived through this post-financial crisis, post-pandemic era of very, very low and negative real interest rates. That is not the norm. There’s regression to mean. You know what? It’s happened. Suddenly, the interest payments start piling up. I think they’ve at least doubled over the last few years. They’re quickly on their way to tripling, of going up to $1 trillion. Suddenly, it’s more than our defense spending. That’s the most important macro change in the world, that real interest rates appear to have regressed more towards long-term trend. …

The problem is in our politics. It’s in our DNA. We’re convinced that we’re immortals, and we can just do whatever we want. You go around Washington, whatever they say, I think that’s what they think. Again, this key thing is that real interest rates, the interest rate adjusted for expected inflation — and I’m looking at the long term — they’ve come up. They’re not super high, but they’re more like they were in the early 2000s, and, I think, of reasonable projections, they’re going to stay around the level they are now. …

My students, for a long time, just didn’t believe there’d ever be inflation again. I would teach it; they would fall asleep. I remember asking a question even to someone who was a research assistant at a big central bank, “Explain this to me about inflation.” She said, “My generation doesn’t ever expect to think about inflation. We don’t have it. Please give examples of this.” So no, I would suspect we will have high real interest rate.