WHY AMERICA LEADS

The spectacular wealth of America continues to dazzle the world. America’s economy consistently records a quick recovery after economic downturns and despite predictions, China is failing to overtake America as the globe’s pre-eminent economy.  Indeed, America’s reliable performance as a top economic player is a result of a flexible institutional framework. Although some analysts complain that regulations are deterring entrepreneurship, America is still more conducive to entrepreneurship than other places.

This is so because of an adaptable legal system and institutional flexibility. Research shows that flexible institutions and laws enable economic growth by ensuring a quick response to a changing economic landscape. The ability of laws and institutions to readily adapt to new environments makes it easier for entrepreneurs to plan and innovate. Despite claims of partisanship, American legislators enact transformative laws with great frequency.

However, due to high standards, Americans may have an unfavorable view of Congress, but relative to other countries the American legislature is disproportionately productive. Americans are unaware that in other countries legislators will debate economic policy for even twenty years without passing a single law. For example, Jamaica shocked many when its lawmakers speedily enacted a series of overdue reforms to appease the International Monetary Fund. Although American legislatures are partisan, their adeptness at passing crucial laws is quite enviable.

Because of greater legislative responsiveness, law is unlikely to become a drag on the economy in America. Regardless of the party in power, American lawmakers enact laws to expedite entrepreneurship and innovation. Under Barack Obama’s watch, Title III of the Jumpstart Our Business Startups (JOBS) Act revolutionized financing by allowing ordinary people to invest in start-ups, a privilege usually reserved for institutional investors and the wealthy. Further under the tutelage of his Republic counterpart Donald Trump, America passed the Small Business Reorganization Act to make the re-adjustment of struggling businesses easier.

Ensuring that businesses function efficiently is baked into the DNA of the American institutional complex. The little-known Regulatory Flexibility Act has played a vital role in perpetuating the dynamism of American small businesses by requiring federal regulatory agencies to review the impact of policies on the efficiency of businesses. American legislators design policy to account for future development, hence eclipsing America will be difficult because such a futuristic approach to policy is atypical. Similarly,  it has been simpler to hire and fire workers in America than in Europe due to flexible labor markets. Flexible labor markets not only reduce long-term unemployment, they also boost competitiveness by making it possible for entrepreneurs to allocate capital and labor.

Yet one cannot discuss institutional flexibility in America without referring to its bankruptcy laws. Rather than penalizing failure, the objective of bankruptcy law in America is to allow entrepreneurs to reorganize efficiently. Filing for bankruptcy does not invoke shame in America and debtor-friendly provisions protect the assets of financially insecure Americans. There is even legal consensus that America’s bankruptcy law is ahead of the curve, as asserted by experts Thomas Jackson and David Skeel: ‘‘At the start of the 21st century, American bankruptcy law is probably the best in the world separating the consequences of insolvency from impeding the placement of assets in their most productive use. Part of this is due to long experience with bankruptcy law…And part of it in the consequence of a history of remarkable innovation – such as the equity receivership for railroad reorganizations in the late 19th and early 20th Century—that led us to use bankruptcy as a utilitarian tool, rather than as a device of shame and punishment.’’

Naysayers speak loudly, but the evidence indicates that America is far from becoming an economic pariah. In fact, scholars interested in uncovering the source of America’s spectacular growth should explore how America’s unique laws and institutions continue to reinforce its supremacy as a global powerhouse.