Barry Eichengreen: The end of American exceptionalism?
Summary
It won’t be easy for future US leaders to turn the clock back now that Trump has undermined the very institutions that made America so successful. Attacks on research funding, immigration and the autonomy of institutions could spell a bleak future for the country.
American exceptionalism has had a long and successful run. Gauged by the growth of GDP per capita and other statistical measures, the US economy has outpaced its advanced-economy rivals since the turn of the century. America is home to the world’s leading high-tech firms. It is at the forefront of artificial intelligence (AI). And investors have cashed in on that outperformance: as of late 2024, US large-cap markets had yielded an average annual return of 13% over the preceding ten years, compared to just 6% for European markets.
The question is whether US President Donald Trump’s destructive policies have now brought this economic exceptionalism to an end. That prospect was reflected in the stock market in April, when the S&P 500 fell more than 17% from its record high after Trump’s inauguration. While the market has since recovered most of those losses, volatility remains high.
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Important voices, not only in the administration, insist that this is just one of those market disturbances that happen from time to time. The wellsprings of American economic excellence—high-tech dominance, a business-friendly environment, deep and liquid financial markets, and a culture of entrepreneurship—remain intact. Just give it time, say the optimists, and Trump’s aberrant policies will be reined in by the bond market, mid-term US elections and the courts.
This Panglossian take underestimates how recent events tear at the fabric of US economic exceptionalism and how difficult that fabric will be to mend. America’s dominance of high technology derives not just from a vibrant business sector, but also from basic research done in universities and government, and from close public-private sector collaboration.
It is no coincidence that the garage in which Hewlett-Packard originated was in Palo Alto, California, close to Stanford University. Nor is the fact that the internet emanated from the US Defense Advanced Research Projects Agency (DARPA), with an assist from the National Science Foundation.
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The Trump administration’s attack on university and government research funding pulls the rug from under this collaboration. US researchers who have seen their funding cut and their academic and intellectual freedom curtailed are being actively recruited by other countries.
The same is true of the administration’s hostility to immigration. The excellence of America’s universities and innovation hubs, such as Silicon Valley, depends on scientists and entrepreneurs who come to the US to study and decide to stay. Given what has been revealed about the way Trump’s America treats immigrants, they will now think twice about studying and staying.
Much has been written about how Trump’s tariffs will disrupt US companies’ supply chains and raise production costs. To be sure, companies will adapt, for example by re-shoring some production. But adapting to Trump’s arbitrary trade regime will also mean offering under-the-table favours in exchange for concessions. A transactional president has revealed the US to be a transactional society, where the highest returns accrue to rent seeking and cronyism rather than initiative and innovation.
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A business environment in which access to the Oval Office is the key to success may increase market concentration, since only a few billionaires have such access. The US has seen how rising market concentration is accompanied by increased price mark-ups over costs, declining market-entry rates, falling job re-allocation and a growing gap between leading and lagging firms. Sooner or later, productivity growth will become a casualty.
Ultimately, economic growth depends on the rule of law, as proponents of the ‘Washington Consensus’ have told developing countries for decades. That, in turn, depends on a separation of powers and a system of checks and balances to prevent the arbitrary exercise of executive authority.
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All of this was well understood by framers of the US Constitution. But recent political events in the US have shown that constitutional and statutory safeguards are weaker than previously supposed. A president who seeks to amass power can use executive orders to override the spending decisions of Congress and the regulatory decisions of supposedly independent government agencies. He can fire independent government administrators at will. He can stare down spineless members of Congress with political threats.
Such a president can also disregard court rulings. If the bond market threatens to misbehave, he can lean on the Fed. As for the disciplining effect of the ballot box, he can dismiss the results of free and fair elections.
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In this environment, neither property rights nor contracts are secure. And as generations of political scientists have taught us, secure property rights are a fundamental determinant of investment, while reliable contract enforcement is the foundation of commerce and trade.
Some observers expect the next US president to turn the clock back to pre-Trump days, making secure property rights, reliable contract enforcement and equality under the law facts of American life again. But some lessons, once learnt, are not easily unlearnt.
Many investors, like house cats, will not jump onto a hot stove twice. ©2025/Project Syndicate
The author is professor of economics and political science at the University of California, Berkeley, and the author, most recently, of ‘In Defense of Public Debt’.
