The American divide exposes the high GDP fallacy

The American economy is a wonder. The Economist observed that average wages in America’s poorest state, Mississippi, are higher than those in Britain, Canada and Germany. American GDP per capita now runs roughly 40% above western Europe. Post-pandemic productivity growth has been significantly faster than that of the eurozone. The consensus is settled: the American economy is the model. It’s certainly a model. American productivity really is higher than European productivity. But that doesn’t tell us who benefits. America isn’t one country; it’s two. In one, things have never been better, while the other is suffering.

There’s no better measure of societal health than life expectancy. And American life expectancy is 3.7 years below other wealthy countries. In fact, the United States ranks 49th in the world and is projected to fall further. Infant mortality is 5.6 per thousand against an OECD average of 4.2. The incarcerated population is about 1.8 million, the largest in the world by absolute count and fifth highest per capita (and even higher than China). And as for Mississippi, those are mean wages, not median. Mississippi’s median household income is far lower than its average, and the median is where the second country lives. Mississippi’s life expectancy is 72.6 years, lower than Mexico and Bangladesh.

The American economy generates unimaginable wealth. The question is where it flows. U.S. institutions used to ensure it diffused broadly: Courts, regulators, labor protections, capital markets, and the tax system all combined to ensure that both Americas benefited. But today, the richest one percent of American men live almost 15 years longer than the poorest. For women, the gap is 10 years. Even the wealthiest Americans have shorter lives than the wealthiest western Europeans. In some comparisons, they live no longer than the poorest people living in northern and western Europe.

This might sound great if you’re in the first America. Wealthy countries, though, aren’t guaranteed to stay that way. In 1913, Argentina was among the 10 richest countries in the world. It had strong universities, deep capital markets, and seven decades of civilian constitutional government. Underneath the surface, an agro-exporter oligarchy captured extraordinary wealth while suppressing labor protections, smallholder development, and the broad industrialisation that could have built a middle class. For 50 years the arrangement worked beautifully for the people running the system. But they kept pushing, even organising a coup to overthrow civilian rule when it threatened their stranglehold on the economy. The result was Peronism and economic disaster. And Argentina today has a per-capita GDP roughly a third of the United States.

The Nobel Prize winners Daron Acemoglu and James Robinson built much of their work on cases like Argentina. They distinguish between inclusive institutions, which create wealth for everyone, and extractive ones, which transfer it to the powerful and well-connected. Extractive institutions haven’t failed. They’ve been perverted. The machinery that should translate wealth into broad prosperity instead concentrates it into a few hands.

That’s the story of the two Americas today. It’s always been good to be wealthy — and it should be. That’s the point of having wealth. But the balance has swung more and more to the point that now the issue isn’t what’s illegal but rather what’s legal. The most direct way for the wealthy to capture the government is to influence politicians financially. Fortunately for them, the Supreme Court has given its OK. In the 2016 case McDonnell v. United States, it effectively legalized the Governor of Virginia’s acceptance of a Rolex, designer clothes for his wife, the use of a Ferrari, and approximately $175,000 in loans and gifts from a businessman seeking state favors. In the 2024 case Snyder v. United States, the Court ruled 6-3 that federal anti-corruption law does not criminalise gratuities to state and local officials. Don’t forget to tip your waiter — and your senator.

Even tax enforcement is being skewed, at enormous cost. Audits of high-income taxpayers are going to drop by two-thirds next year, at a cost of $860 billion, over a decade, because an hour auditing a taxpayer earning over $5 million yields about $4,900 in additional tax, versus $650 for taxpayers earning around $200,000. That $860 billion has to be paid by middle-class taxpayers who don’t have lawyers and accountants to help them get around the law.

The diagnosis is the easy part but fixing the problem will take major reform. Congress could start by restoring the bribery statute. Bills to do exactly that exist. They’ve just been tabled by a compliant Congress. And the Justice Department’s Public Integrity Section, which used to prosecute corruption, can be rebuilt. It’s been slashed from around 40 prosecutors handling 200 open cases to two prosecutors handling roughly 20 cases today. Public integrity is the foundation of good government, and the Justice Department should treat it that way. That’s just the beginning, of course.

But it’s not just up to the politicians. The business community must act too. Inclusive institutions survive when elites are wise enough to defend them instead of capturing them. Too many of America’s business leaders have spent the last decade using their resources and their influence to distort the system in their favor. Instead, they need to spend to preserve it — and hold each other accountable when they do the opposite.

This is critical because America’s business elite aren’t innocent bystanders to extraction; they’re its primary beneficiaries — and the people with the most to lose if the system breaks. Argentina’s oligarchs were doing extraordinarily well until they pushed too far. We should pay more attention to their example. Extraction doesn’t work in the long run, even for the extractors.