Many stylized economic models assume labor and capital are the only constraints to growth—studies on the effect of immigration on wages for example. Modeling the wrong binding constraints lead to mistaken conclusions.
In my upcoming book, The Upside of Inequality, I argue the economy’s willingness and capacity to bear risk constrains growth today and that this is largely a function of the economy’s equity. Debt, after all, is risk-averse and won’t invest unless equity bears a disproportionate share of the risk.
Below is a graphical representation of the world’s debt and equity markets. The U.S. has far more equity than other economies. The U.S. economy grew faster than other high-wage economies prior to the financial crisis and it has recovered faster since. It produces far more innovation than other economies and currently deploys 70% of the world’s venture capital.
