This is the most convincing version of the federalism-as-moat argument I've read. What I'd add from where I sit tracking India and other emerging markets at MarketMind is that this is precisely the structural advantage most EM economies lack. A country can have brilliant individual policy, but without credible commitment to multi-decade continuity at the sub-national level, the policy gets reversed before the compounding shows up. The US doesn't need its federal government to be competent, it needs fifty governments where enough of them stay competent long enough to compound.
Beyond attracting talent, an aspect of the SV non-compete secret sauce that outsiders sometimes miss is the rapid diffusion of "best practices" throughout SV due to constant job-hopping cross-pollinating knowledge across the industry. It's a place where people can switch tribes and take some of the tribal knowledge with them as they go. Yes, you can't take true intellectual property EG actual lines of code with you, but you can take the high level knowledge that "this general tech stack and architecture is useful for solving problems like this" or even the more basic insight of "this is a problem that is very solvable with tooling/software that is widely available today."
Having worked both in and outside of SV I am sometimes stunned by the extent to which more legacy business just continue to deal with basic operational business problems for which cost-effective off-the-shelf solutions already fully exist, or continue to stick with legacy solution providers that have plainly and self-evidently already been outclassed/disrupted by new entrants... Microsoft Teams in 2026 for example.
And yes, the line between "best practices" and true "intellectual property" is sometimes fuzzy and difficult to litigate which... is probably good, actually, in the sense that it injects just the right amount of socialism into the concept of intellectual "property" in the first place. IP is ultimately a rent-seeking and thus growth-impairing mechanism. We need it to exist to establish profit motive in the first place but tempering it with the soft diffusion of best practices across your competitors is probably the ideal balance to strike.
Thank you for your contribution. You're absolutely right about the rapid diffusion of best practices throughout Silicon Valley due to constant job-hopping cross-pollinating knowledge across the industry. This mobility is undeniably a core engine of the region's broader success; it ensures that the most efficient operational frameworks and tooling stacks naturally rise to the top, preventing modern technology companies from stagnating like legacy businesses.
Your observation highlights exactly why building within such a dynamic ecosystem is an advantage for organizations that know how to capture that diffused knowledge efficiently.
Yes. States dominated by a single party allow that ruling faction to compound their economic policies over decades; the policy continuity creates dominant flywheels. Conversely, the federal government continuously switches between the two major parties, so it is structurally impossible for the US to maintain a coherent, consistent foreign policy that compounds over decades, unlike China.
Superb analysis and argument. First past the post doesn't guarantee stability though. Here in the UK we've had FPTP as the sole means of determining Parliamentary representation since 1951. Our Prime Minister resigned today. Since the start of 2016 we've had six PMs (Cameron, May, Johnson, Truss, Sunak and Starmer) and are about to get our seventh (very likely, it currently seems, Burnham), probably in a month or so. That's no stability.
We completely agree with your assessment. The UK government has been particularly unstable since Brexit because the decision to leave the European Union has created severe structural economic headwinds. It is worth noting that David Cameron chose to hold the Brexit vote in the hopes of solidifying his power in Parliament and managing internal Conservative Party divisions; he calculated that voters would comfortably choose to remain (which would theoretically bolster his influence and settle the Europe question within his party). Instead, the gamble resulted in historic structural disruptions.
This sustained volatility in the UK makes us wonder if a US-style two-party system would be better for ensuring political and economic predictability. At the very least, there are no nationwide binding referendums in the US; this is a structural safeguard that protects the system from sudden populist shocks. Furthermore, the presence of smaller parties in Parliament, like Reform UK and the Green Party, has introduced further disarray in Westminster, complicating the legislative process and adding to the overall uncertainty.
It's 19:14 here in Kyiv as I was recently reflecting on how great America really is and what it means to be American as we approach our 250th. Then, your article popped up and it made me miss home even more. The takeaway? Be an American, step up my game, create a niche, and find a way to come back.. Thank you for the inspiration.
This was great, though IMV a few of the explanations are more unicausal than they are in practice. Do you see a swing towards ‘more and greater federalism’ as the Presidency/Congress remain comparatively weak/unproductive, slash do you see state legislatures deepening their capacity as their effective relevance increases? Or do you largely view the status quo as a feature rather than a bug, with no especial structural solutions necessary?
The explanations are definitely more unicausal than they are in practice; this is to avoid turning a 30-minute article into a book.
To answer your questions: the answer is yes to both.
We anticipate states becoming the dominant drivers of policy and economic development, especially as gerrymandering exacerbates gridlock in Washington. The conservative Supreme Court has also consistently upheld state power and autonomy.
A highly united federal government might be theoretically optimal, but given current partisan antagonism, it is impossible. Thus, it is more effective to focus on what can be achieved under existing circumstances.
Great pointer. The 1940 election is a striking one: FDR broke Washington's two-term precedent to win a third term, and the campaign was a target of documented foreign influence operations, with German and British agents running propaganda on US soil, from planted news stories to rigged opinion polls. Paul Starobin's "Fake News and Election Meddling—1940s style" (https://www.historynet.com/fake-news-1940s-style/) is a good overview, and a useful reminder that questions about election integrity long predate the 1990s. Thanks for adding the context.
Personally, I keep trying to decrease the US share in my portfolio mostly to keep it diversified. It is not easy, and for a good reason. Tech is outperforming and it is predominantly US based. The pro-business environment and shareholder value focus is hard to find somewhere else.
Where I am less convinced is the degree to which federalism alone explains U.S. outperformance. Deep capital markets, reserve-currency status, immigration, world-class universities and a culture that tolerates risk-taking have also mattered enormously.
One note on nuclear power in Germany. It is not the political system that 'stopped it', it was the electorate. The technology has been very unpopular for Germany for many decades and no one wanted to have the waste in their neighborhoods. That's the reason. The trigger and timing was the nuclear accident in Japan. It is neither the reason that energy prices are up; renewable is still cheaper where we are now at around 50% in the mix, especially after integrating the extreme long storage costs. That said, I agree though with the debate whether it was a good or bad decision but less for cost reasons and more future energy demand.
Congratulations on the strong performance of the US allocation within your portfolio.
"The pro-business environment and shareholder value focus is hard to find somewhere else. Where I am less convinced is the degree to which federalism alone explains U.S. outperformance. Deep capital markets, reserve-currency status, immigration, world-class universities and a culture that tolerates risk-taking have also mattered enormously."
We completely agree. Federalism is a crucial framework, but it acts as a force multiplier for those exact pillars. The point regarding immigration is particularly vital as an economic tailwind. Looking at the top companies by market capitalization globally, a disproportionate number, including Nvidia, Alphabet, Broadcom, Tesla, and SpaceX, feature immigrants or first-generation Americans on their founding teams.
Regarding the phase-out of German nuclear power, your observation about the electorate's prevailing sentiment is accurate. However, the core divergence between the US and Germany is how their political systems translate public unpopularity into policy.
The US constitutional framework is explicitly designed to limit the immediate influence of majoritarian sentiment. Mechanisms like the Senate, the filibuster, the Electoral College, and the Supreme Court create immense policy friction. While this prevents nationwide consensus on various social issues like abortion and gun control, it also insulates strategic economic engines from shifting public moods. A prime example is the US shale revolution; during the 2010s, hydraulic fracturing became highly unpopular among voters, yet the federal system's deliberate gridlock prevented sweeping national action to halt it, ultimately securing long-term energy independence.
Great post, I would add that another important factor is that the few things that the federal government needs to do has been effectively delegated to bureaucracies that manage these tasks independently, avoiding the bipartisan gridlock. Best example of that is the Fed, the federation would be worse off without a unique currency, partisanship would have wrecked the dollar, so everyone decided to just leave it to experienced economists, and everyone is better off as a result
As we acknowledged in the section "No Country is Without Problems, Of Course", the United States certainly faces tangible challenges regarding inequality and decaying infrastructure.
Furthermore, scale is a critical factor in these cross-border analyses: the US has a population of 340 million, whereas Sweden (the most populous Scandinavian country) has 11m residents. A more accurate, apples-to-apples comparison would weigh Northern European nations against individual American metropolitan areas, and NYC (20m) and LA (13m) would be far richer than Northern Europe.
But the gap is narrower than people think. Happiness score: Sweden (7.3), US (6.8).
Just as with economic metrics, aggregating 340 million people across vast geographic divides dilutes regional successes. Citizens living in the most economically productive American cities, with populations more in line with Scandinavian countries, likely experience happiness levels just as high.
Undoubtedly, the success of the United States is unevenly distributed, but the country does have profound, systemic strength.
Agreed. A comparison is indeed difficult for numerous reasons. What is particularly remarkable is the number of European countries that score so highly.
An addition. Dutch historian Maarten van Rossem spoke with Paul Krugman and noted how striking it is that countries that are so poorly led (referring to the US as the Netherlands) can still be so economically successful.
Comparing US and Northern European economic performance requires context on scale. Providing a high standard of living for 340 million people involves complex supply chains, diverse industries, and extensive infrastructure. Consequently, a massive nation matching the GDP per capita of an 11-million-person nation possesses a fundamentally stronger economy.
This scaling principle also applies to happiness metrics. Demographically, Scandinavia resembles a collection of the most prosperous US states. With overall US happiness (6.8) trailing Sweden (7.3) only slightly, we argue that happiness in the best-run US states matches Scandinavian levels.
Regarding Paul Krugman's commentary on measurement illusions: he correctly notes the US growth advantage is heavily driven by technology. However, treating this sector as a statistical outlier misses market reality. American tech dominance is a structural advantage, not an anomaly. While purchasing power parity reflects historical consumer standards, capital consistently flows toward markets building future infrastructure. The US ecosystem fosters these industries at a scale Europe struggles to match, demonstrating systemic strength well beyond any measurement illusion.
Finally, regarding economic success despite poor leadership: this article is our explanation for this dynamic in the US.
The difference between a federal state and a parliamentary democracy is probably not even that great. Scale does indeed play a role and is fitting for a country as large as a continent. The Netherlands is the size of an American state.
But the Netherlands shares striking similarities with your story. In the last elections in October 2025, we in the Netherlands could vote for 27 parties. A populist party received a large share of the votes but was forced by the result to form a workable coalition with two other major parties.
Despite this division, a large part of daily administration takes place at the provincial and even local levels. Think of Brainport Eindhoven and the Randstad region with the Port of Rotterdam and Schiphol Airport. Without wanting to caricature scale, I think the mechanism is comparable.
Where major differences likely exist is in energy dependencies. The Netherlands has a large gas reserve but has closed it because subsidence caused by extraction damaged parts of the province of Groningen. With the loss of cheap Russian gas, a lively discussion has arisen regarding the reopening of these sources. Nevertheless, for the time being, the safety of the residents in the area is being prioritized.
Another difference is perhaps social democracy, which from an American perspective is sometimes mistakenly confused with a form of communism. It contributes to a certain form of social redistribution but primarily aims to soften the sharp edges of capitalism. It is striking that here, political unrest and the increasingly loud voice of populists coincide with growing wealth inequality, and that the negative externalities of market forces are becoming a real burden for many. It has a negative impact on migration, housing, working conditions, healthcare, etc.
At the European level, the dynamics are somewhat different, but individual countries retain significant sovereignty due to the differences. The desire for more centralized governance from Europe, like the budget, is heavily debated.
One similarity between US federalism and European parliamentary systems is that both can end up gridlocked and ineffective. Where parliamentary systems differ is speed: once a coalition commits, it can move very fast, for better or worse. Angela Merkel's 2011 decision to accelerate Germany's nuclear phaseout after Fukushima illustrates this dynamic: reactors were shut down quickly, the exit was locked in, and only years later is it widely described in Germany as a serious strategic error regarding energy security and competitiveness. Short-term sentiment and coalition constraints overpowered long-term resilience.
The US makes its own mistakes; for example, California's environmental regulations prevent the state from fully utilizing its energy resources, while Texas and Florida cap the potential of talented employees by allowing noncompetes. However, the federal system means that each state can cover for the weaknesses of another.
Regarding the Netherlands, your example strengthens the core argument in this article. Despite a very fragmented national parliament, economic and administrative gravity sits in regional hubs like Brainport and the Randstad, much as it does in leading US states. The major difference is exactly what you highlighted: Europe's tighter energy constraints and external dependencies leave far less room to absorb policy mistakes than the US currently enjoys.
Democratic socialism is certainly a growing political force in the US as well, with figures like Zohran Mamdani in New York City, Alexandria Ocasio-Cortez, and Bernie Sanders gaining prominence on the national stage. Their message is increasingly appealing to American voters, and they are likely to have a significant impact on the national stage in the foreseeable future. Both the US and EU must navigate the political unrest and populist pressures that arise from growing wealth inequality.
The mainstream narrative regarding the EU is that the problem is a lack of centralization and that each country is too focused on its own sovereignty. However, this article reveals the vast differences among American states regarding policies and political views and presents a significant challenge to that mainstream EU narrative. It is precisely the structural differences among US states that make the American economy strong.
Decades ago, when the EU was less integrated than it is today, it was just as strong economically as the US. Back then, however, the EU had a stable and growing energy supply and operated without the heavier regulatory burdens introduced by recent climate and degrowth policy shifts.
Therefore, perhaps the answer for the EU is not more integration. Perhaps the solution is securing more reliable and abundant energy. Lower cost and more reliable energy will supercharge the industries where European countries dominate and are recognized globally as the best. European nations maintain global leadership in advanced industrial machinery and robotics, luxury goods and fashion, pharmaceuticals and life sciences, and aerospace manufacturing. What slows them down is expensive energy relative to their key economic competitors, the US and China: https://www.visualcapitalist.com/electricity-costs-most-and-least-by-country/
The last thing Europe should be is homogeneous. After all, American culture and the American people are not homogenous. Each country should leverage its own specialization and comparative advantage to build and strengthen the dominant flywheel that no other nation can beat.
If a parliamentary democracy (and officially even a kingdom) can already achieve diversification and clustering within a small geographic area, then the central thesis of your piece, that this advantage stems primarily from a federal structure of government, cannot hold, and the clustering must arise from something else.
The EU is a cooperative association (confederation) of 27 independent member states. The member states largely retain their own sovereignty, but they have transferred powers to the EU in order to achieve common goals. Proponents of far-reaching integration sometimes advocate for a federal Europe, while critics emphasize the independence of the member states.
The European Union (EU) stems from the European Coal and Steel Community (ECSC), founded in 1951, which intended to economically bind countries and make them interdependent so that the many wars fought on the continent would come to a halt. In that regard, after 80 years of relative peace on the continent, the EU has succeeded.
In my opinion, German energy policy is also best understood historically from the perspective of Ostpolitik, through which rapprochement with Russia was already being sought in the 1970s. 'Wandel durch Annäherung' (Change through Rapprochement) aimed to improve and normalize the relationship between Germany and Russia through economic relations. That is where the foundation was laid for the energy dependence that led to the Nord Stream I and II projects. Although the geopolitical dangers were recognized early on and the project was actually intended to bypass Ukraine as a transit country for Russian gas, this was downplayed by stakeholders who framed it as a private economic project.
Nuclear energy has always been a sensitive issue in Germany. As early as 2000, under the Schröder government, an agreement in principle emerged to eventually close German nuclear power plants: the Atomausstieg (nuclear phase-out). In the autumn of 2010, Merkel instead extended the operating lifespans of the reactors (the Laufzeitverlängerung), thereby reversing the Schröder agreement. Following the nuclear disaster in Fukushima, Japan, the government changed its stance under pressure from public opinion, and the closure was accelerated after all. The phase-out was therefore a persistent societal movement and not a coincidental coalition whim.
Bear in mind that the Russian invasion of Ukraine, which was missed by many analysts, is what ultimately exposed the strategic weakness of Germany's (and Europe's) energy policy.
‘We were all wrong’: how Germany got hooked on Russian energy
You could also apply that history and economic geography to industrial policy. Various crises have exposed a strategic vulnerability in offshoring industry to Asia: the very leanness and efficiency that made those supply chains attractive is what makes them fragile, since a single shock—a pandemic, a war, a blockade—is enough to sever them. One could also argue that fossil fuel interests kept the German auto industry clinging to the combustion engine for too long. Although they lag significantly behind Tesla and Chinese manufacturers in terms of electrification, numerous successful models have been designed that are driving around everywhere in Europe. This late adaptation can easily be explained by the existing infrastructure, and this constraining reality was simply not an issue for Tesla as a startup or in China.
Wrong choices largely stemmed from economic interests, not from the parliamentary system.
Closer to my own hometown, this also applies to the city of Eindhoven, which was practically shaped by Philips in the last century. There are neighborhoods built by Philips for their employees that still exist as attractive residential areas today. The football club PSV (Philips Sport Vereniging (Philips Sports Club) also originated during this time. After production was moved to Asia in the 1990s and the headquarters relocated to Amsterdam in 2001, Eindhoven was not left behind as an industrial wasteland. Instead, it reinvented itself as the Brainport region, with ASML as a notable Philips spin-off and a global player in lithography machines. Former Philips CEO Gerard Kleisterlee points out in an interesting article in a local newspaper how important the historical constellation has been:
Een opvolger van Philips en ASML? Vergeet het maar, waarschuwt Gerard Kleisterlee (A successor to Philips and ASML? Forget about it, warns Gerard Kleisterlee)
Returning to my argument, all these cases point to path dependence and agglomeration as the real engine, and that this works just as well in a fragmented parliamentary system as it does in a federal one.
Hilarious and weirdly patriotic. God bless this fucked-up country, nowhere else compares
This is the most convincing version of the federalism-as-moat argument I've read. What I'd add from where I sit tracking India and other emerging markets at MarketMind is that this is precisely the structural advantage most EM economies lack. A country can have brilliant individual policy, but without credible commitment to multi-decade continuity at the sub-national level, the policy gets reversed before the compounding shows up. The US doesn't need its federal government to be competent, it needs fifty governments where enough of them stay competent long enough to compound.
Beyond attracting talent, an aspect of the SV non-compete secret sauce that outsiders sometimes miss is the rapid diffusion of "best practices" throughout SV due to constant job-hopping cross-pollinating knowledge across the industry. It's a place where people can switch tribes and take some of the tribal knowledge with them as they go. Yes, you can't take true intellectual property EG actual lines of code with you, but you can take the high level knowledge that "this general tech stack and architecture is useful for solving problems like this" or even the more basic insight of "this is a problem that is very solvable with tooling/software that is widely available today."
Having worked both in and outside of SV I am sometimes stunned by the extent to which more legacy business just continue to deal with basic operational business problems for which cost-effective off-the-shelf solutions already fully exist, or continue to stick with legacy solution providers that have plainly and self-evidently already been outclassed/disrupted by new entrants... Microsoft Teams in 2026 for example.
And yes, the line between "best practices" and true "intellectual property" is sometimes fuzzy and difficult to litigate which... is probably good, actually, in the sense that it injects just the right amount of socialism into the concept of intellectual "property" in the first place. IP is ultimately a rent-seeking and thus growth-impairing mechanism. We need it to exist to establish profit motive in the first place but tempering it with the soft diffusion of best practices across your competitors is probably the ideal balance to strike.
Thank you for your contribution. You're absolutely right about the rapid diffusion of best practices throughout Silicon Valley due to constant job-hopping cross-pollinating knowledge across the industry. This mobility is undeniably a core engine of the region's broader success; it ensures that the most efficient operational frameworks and tooling stacks naturally rise to the top, preventing modern technology companies from stagnating like legacy businesses.
Your observation highlights exactly why building within such a dynamic ecosystem is an advantage for organizations that know how to capture that diffused knowledge efficiently.
One question to ask: does this weak federal government make for stronger domestic economic policy, but worse international policy?
Yes. States dominated by a single party allow that ruling faction to compound their economic policies over decades; the policy continuity creates dominant flywheels. Conversely, the federal government continuously switches between the two major parties, so it is structurally impossible for the US to maintain a coherent, consistent foreign policy that compounds over decades, unlike China.
Superb analysis and argument. First past the post doesn't guarantee stability though. Here in the UK we've had FPTP as the sole means of determining Parliamentary representation since 1951. Our Prime Minister resigned today. Since the start of 2016 we've had six PMs (Cameron, May, Johnson, Truss, Sunak and Starmer) and are about to get our seventh (very likely, it currently seems, Burnham), probably in a month or so. That's no stability.
We completely agree with your assessment. The UK government has been particularly unstable since Brexit because the decision to leave the European Union has created severe structural economic headwinds. It is worth noting that David Cameron chose to hold the Brexit vote in the hopes of solidifying his power in Parliament and managing internal Conservative Party divisions; he calculated that voters would comfortably choose to remain (which would theoretically bolster his influence and settle the Europe question within his party). Instead, the gamble resulted in historic structural disruptions.
This sustained volatility in the UK makes us wonder if a US-style two-party system would be better for ensuring political and economic predictability. At the very least, there are no nationwide binding referendums in the US; this is a structural safeguard that protects the system from sudden populist shocks. Furthermore, the presence of smaller parties in Parliament, like Reform UK and the Green Party, has introduced further disarray in Westminster, complicating the legislative process and adding to the overall uncertainty.
Great piece, thanks for sharing
It's 19:14 here in Kyiv as I was recently reflecting on how great America really is and what it means to be American as we approach our 250th. Then, your article popped up and it made me miss home even more. The takeaway? Be an American, step up my game, create a niche, and find a way to come back.. Thank you for the inspiration.
This was great, though IMV a few of the explanations are more unicausal than they are in practice. Do you see a swing towards ‘more and greater federalism’ as the Presidency/Congress remain comparatively weak/unproductive, slash do you see state legislatures deepening their capacity as their effective relevance increases? Or do you largely view the status quo as a feature rather than a bug, with no especial structural solutions necessary?
The explanations are definitely more unicausal than they are in practice; this is to avoid turning a 30-minute article into a book.
To answer your questions: the answer is yes to both.
We anticipate states becoming the dominant drivers of policy and economic development, especially as gerrymandering exacerbates gridlock in Washington. The conservative Supreme Court has also consistently upheld state power and autonomy.
Regarding the status quo, we approach political realities the same way we approach markets, by playing the cards we are dealt: https://blog.inverteum.com/p/trading-sailgp
A highly united federal government might be theoretically optimal, but given current partisan antagonism, it is impossible. Thus, it is more effective to focus on what can be achieved under existing circumstances.
Yeah I think that’s well-framed and makes sense.
>Starting around the same time that US elections became “fake” in the 1990s, the US went from having similar per-capita output
If you really want to have your mind blown take a look at the election of 1940.
Great pointer. The 1940 election is a striking one: FDR broke Washington's two-term precedent to win a third term, and the campaign was a target of documented foreign influence operations, with German and British agents running propaganda on US soil, from planted news stories to rigged opinion polls. Paul Starobin's "Fake News and Election Meddling—1940s style" (https://www.historynet.com/fake-news-1940s-style/) is a good overview, and a useful reminder that questions about election integrity long predate the 1990s. Thanks for adding the context.
Consider the fact that Wendall Wilkie was a new deal democrat just 6 months before the republican convention.
Thank god man, thank you for this piece. So much of what I read is asinine bullshit and cultural gossip but this actually real.
Incredible read. I’ve never heard this argument so well crafted. Thank you for taking the time to write and for sharing.
Glad i didnt miss this, very well crafted arguments as always
Interesting perspective.
Personally, I keep trying to decrease the US share in my portfolio mostly to keep it diversified. It is not easy, and for a good reason. Tech is outperforming and it is predominantly US based. The pro-business environment and shareholder value focus is hard to find somewhere else.
Where I am less convinced is the degree to which federalism alone explains U.S. outperformance. Deep capital markets, reserve-currency status, immigration, world-class universities and a culture that tolerates risk-taking have also mattered enormously.
One note on nuclear power in Germany. It is not the political system that 'stopped it', it was the electorate. The technology has been very unpopular for Germany for many decades and no one wanted to have the waste in their neighborhoods. That's the reason. The trigger and timing was the nuclear accident in Japan. It is neither the reason that energy prices are up; renewable is still cheaper where we are now at around 50% in the mix, especially after integrating the extreme long storage costs. That said, I agree though with the debate whether it was a good or bad decision but less for cost reasons and more future energy demand.
Congratulations on the strong performance of the US allocation within your portfolio.
"The pro-business environment and shareholder value focus is hard to find somewhere else. Where I am less convinced is the degree to which federalism alone explains U.S. outperformance. Deep capital markets, reserve-currency status, immigration, world-class universities and a culture that tolerates risk-taking have also mattered enormously."
We completely agree. Federalism is a crucial framework, but it acts as a force multiplier for those exact pillars. The point regarding immigration is particularly vital as an economic tailwind. Looking at the top companies by market capitalization globally, a disproportionate number, including Nvidia, Alphabet, Broadcom, Tesla, and SpaceX, feature immigrants or first-generation Americans on their founding teams.
Regarding the phase-out of German nuclear power, your observation about the electorate's prevailing sentiment is accurate. However, the core divergence between the US and Germany is how their political systems translate public unpopularity into policy.
The US constitutional framework is explicitly designed to limit the immediate influence of majoritarian sentiment. Mechanisms like the Senate, the filibuster, the Electoral College, and the Supreme Court create immense policy friction. While this prevents nationwide consensus on various social issues like abortion and gun control, it also insulates strategic economic engines from shifting public moods. A prime example is the US shale revolution; during the 2010s, hydraulic fracturing became highly unpopular among voters, yet the federal system's deliberate gridlock prevented sweeping national action to halt it, ultimately securing long-term energy independence.
Thank you for the additional clarification around the constitutional framework and its impact on exceptionalism.
Great post, I would add that another important factor is that the few things that the federal government needs to do has been effectively delegated to bureaucracies that manage these tasks independently, avoiding the bipartisan gridlock. Best example of that is the Fed, the federation would be worse off without a unique currency, partisanship would have wrecked the dollar, so everyone decided to just leave it to experienced economists, and everyone is better off as a result
One of the best reads I’ve had in a long time.
Excellent article!
The question remains: why do the citizens of most Northern European countries belong to the richest and happiest in the world?
And does that American success apply to all citizens? People and infrastructure seem neglected behind a luxurious, wealthy shell.
As we acknowledged in the section "No Country is Without Problems, Of Course", the United States certainly faces tangible challenges regarding inequality and decaying infrastructure.
However, characterizing American success as merely a luxurious, wealthy shell overlooks the reality. As a whole, the United States matches or outperforms Northern Europe in global wealth metrics: https://www.visualcapitalist.com/ranked-25-richest-countries-in-the-world-by-three-metrics/
Furthermore, scale is a critical factor in these cross-border analyses: the US has a population of 340 million, whereas Sweden (the most populous Scandinavian country) has 11m residents. A more accurate, apples-to-apples comparison would weigh Northern European nations against individual American metropolitan areas, and NYC (20m) and LA (13m) would be far richer than Northern Europe.
Regarding happiness, Northern Europe does score higher: https://www.visualcapitalist.com/ranked-the-worlds-happiest-countries-in-2026/
But the gap is narrower than people think. Happiness score: Sweden (7.3), US (6.8).
Just as with economic metrics, aggregating 340 million people across vast geographic divides dilutes regional successes. Citizens living in the most economically productive American cities, with populations more in line with Scandinavian countries, likely experience happiness levels just as high.
Undoubtedly, the success of the United States is unevenly distributed, but the country does have profound, systemic strength.
Agreed. A comparison is indeed difficult for numerous reasons. What is particularly remarkable is the number of European countries that score so highly.
World Happiness Report 2026 https://data.worldhappiness.report/table
Regardless of the outcome, it is more interesting that this discussion is being held at all:
Europe Versus America: A Response to the Critics https://paulkrugman.substack.com/p/europe-versus-america-a-response
An addition. Dutch historian Maarten van Rossem spoke with Paul Krugman and noted how striking it is that countries that are so poorly led (referring to the US as the Netherlands) can still be so economically successful.
Comparing US and Northern European economic performance requires context on scale. Providing a high standard of living for 340 million people involves complex supply chains, diverse industries, and extensive infrastructure. Consequently, a massive nation matching the GDP per capita of an 11-million-person nation possesses a fundamentally stronger economy.
This scaling principle also applies to happiness metrics. Demographically, Scandinavia resembles a collection of the most prosperous US states. With overall US happiness (6.8) trailing Sweden (7.3) only slightly, we argue that happiness in the best-run US states matches Scandinavian levels.
Regarding Paul Krugman's commentary on measurement illusions: he correctly notes the US growth advantage is heavily driven by technology. However, treating this sector as a statistical outlier misses market reality. American tech dominance is a structural advantage, not an anomaly. While purchasing power parity reflects historical consumer standards, capital consistently flows toward markets building future infrastructure. The US ecosystem fosters these industries at a scale Europe struggles to match, demonstrating systemic strength well beyond any measurement illusion.
Finally, regarding economic success despite poor leadership: this article is our explanation for this dynamic in the US.
The difference between a federal state and a parliamentary democracy is probably not even that great. Scale does indeed play a role and is fitting for a country as large as a continent. The Netherlands is the size of an American state.
But the Netherlands shares striking similarities with your story. In the last elections in October 2025, we in the Netherlands could vote for 27 parties. A populist party received a large share of the votes but was forced by the result to form a workable coalition with two other major parties.
Despite this division, a large part of daily administration takes place at the provincial and even local levels. Think of Brainport Eindhoven and the Randstad region with the Port of Rotterdam and Schiphol Airport. Without wanting to caricature scale, I think the mechanism is comparable.
Where major differences likely exist is in energy dependencies. The Netherlands has a large gas reserve but has closed it because subsidence caused by extraction damaged parts of the province of Groningen. With the loss of cheap Russian gas, a lively discussion has arisen regarding the reopening of these sources. Nevertheless, for the time being, the safety of the residents in the area is being prioritized.
Another difference is perhaps social democracy, which from an American perspective is sometimes mistakenly confused with a form of communism. It contributes to a certain form of social redistribution but primarily aims to soften the sharp edges of capitalism. It is striking that here, political unrest and the increasingly loud voice of populists coincide with growing wealth inequality, and that the negative externalities of market forces are becoming a real burden for many. It has a negative impact on migration, housing, working conditions, healthcare, etc.
At the European level, the dynamics are somewhat different, but individual countries retain significant sovereignty due to the differences. The desire for more centralized governance from Europe, like the budget, is heavily debated.
One similarity between US federalism and European parliamentary systems is that both can end up gridlocked and ineffective. Where parliamentary systems differ is speed: once a coalition commits, it can move very fast, for better or worse. Angela Merkel's 2011 decision to accelerate Germany's nuclear phaseout after Fukushima illustrates this dynamic: reactors were shut down quickly, the exit was locked in, and only years later is it widely described in Germany as a serious strategic error regarding energy security and competitiveness. Short-term sentiment and coalition constraints overpowered long-term resilience.
The US makes its own mistakes; for example, California's environmental regulations prevent the state from fully utilizing its energy resources, while Texas and Florida cap the potential of talented employees by allowing noncompetes. However, the federal system means that each state can cover for the weaknesses of another.
Regarding the Netherlands, your example strengthens the core argument in this article. Despite a very fragmented national parliament, economic and administrative gravity sits in regional hubs like Brainport and the Randstad, much as it does in leading US states. The major difference is exactly what you highlighted: Europe's tighter energy constraints and external dependencies leave far less room to absorb policy mistakes than the US currently enjoys.
Democratic socialism is certainly a growing political force in the US as well, with figures like Zohran Mamdani in New York City, Alexandria Ocasio-Cortez, and Bernie Sanders gaining prominence on the national stage. Their message is increasingly appealing to American voters, and they are likely to have a significant impact on the national stage in the foreseeable future. Both the US and EU must navigate the political unrest and populist pressures that arise from growing wealth inequality.
The mainstream narrative regarding the EU is that the problem is a lack of centralization and that each country is too focused on its own sovereignty. However, this article reveals the vast differences among American states regarding policies and political views and presents a significant challenge to that mainstream EU narrative. It is precisely the structural differences among US states that make the American economy strong.
Decades ago, when the EU was less integrated than it is today, it was just as strong economically as the US. Back then, however, the EU had a stable and growing energy supply and operated without the heavier regulatory burdens introduced by recent climate and degrowth policy shifts.
Therefore, perhaps the answer for the EU is not more integration. Perhaps the solution is securing more reliable and abundant energy. Lower cost and more reliable energy will supercharge the industries where European countries dominate and are recognized globally as the best. European nations maintain global leadership in advanced industrial machinery and robotics, luxury goods and fashion, pharmaceuticals and life sciences, and aerospace manufacturing. What slows them down is expensive energy relative to their key economic competitors, the US and China: https://www.visualcapitalist.com/electricity-costs-most-and-least-by-country/
The last thing Europe should be is homogeneous. After all, American culture and the American people are not homogenous. Each country should leverage its own specialization and comparative advantage to build and strengthen the dominant flywheel that no other nation can beat.
If a parliamentary democracy (and officially even a kingdom) can already achieve diversification and clustering within a small geographic area, then the central thesis of your piece, that this advantage stems primarily from a federal structure of government, cannot hold, and the clustering must arise from something else.
The EU is a cooperative association (confederation) of 27 independent member states. The member states largely retain their own sovereignty, but they have transferred powers to the EU in order to achieve common goals. Proponents of far-reaching integration sometimes advocate for a federal Europe, while critics emphasize the independence of the member states.
The European Union (EU) stems from the European Coal and Steel Community (ECSC), founded in 1951, which intended to economically bind countries and make them interdependent so that the many wars fought on the continent would come to a halt. In that regard, after 80 years of relative peace on the continent, the EU has succeeded.
In my opinion, German energy policy is also best understood historically from the perspective of Ostpolitik, through which rapprochement with Russia was already being sought in the 1970s. 'Wandel durch Annäherung' (Change through Rapprochement) aimed to improve and normalize the relationship between Germany and Russia through economic relations. That is where the foundation was laid for the energy dependence that led to the Nord Stream I and II projects. Although the geopolitical dangers were recognized early on and the project was actually intended to bypass Ukraine as a transit country for Russian gas, this was downplayed by stakeholders who framed it as a private economic project.
Nuclear energy has always been a sensitive issue in Germany. As early as 2000, under the Schröder government, an agreement in principle emerged to eventually close German nuclear power plants: the Atomausstieg (nuclear phase-out). In the autumn of 2010, Merkel instead extended the operating lifespans of the reactors (the Laufzeitverlängerung), thereby reversing the Schröder agreement. Following the nuclear disaster in Fukushima, Japan, the government changed its stance under pressure from public opinion, and the closure was accelerated after all. The phase-out was therefore a persistent societal movement and not a coincidental coalition whim.
Bear in mind that the Russian invasion of Ukraine, which was missed by many analysts, is what ultimately exposed the strategic weakness of Germany's (and Europe's) energy policy.
‘We were all wrong’: how Germany got hooked on Russian energy
https://www.theguardian.com/world/2022/jun/02/germany-dependence-russian-energy-gas-oil-nord-stream
You could also apply that history and economic geography to industrial policy. Various crises have exposed a strategic vulnerability in offshoring industry to Asia: the very leanness and efficiency that made those supply chains attractive is what makes them fragile, since a single shock—a pandemic, a war, a blockade—is enough to sever them. One could also argue that fossil fuel interests kept the German auto industry clinging to the combustion engine for too long. Although they lag significantly behind Tesla and Chinese manufacturers in terms of electrification, numerous successful models have been designed that are driving around everywhere in Europe. This late adaptation can easily be explained by the existing infrastructure, and this constraining reality was simply not an issue for Tesla as a startup or in China.
Wrong choices largely stemmed from economic interests, not from the parliamentary system.
Closer to my own hometown, this also applies to the city of Eindhoven, which was practically shaped by Philips in the last century. There are neighborhoods built by Philips for their employees that still exist as attractive residential areas today. The football club PSV (Philips Sport Vereniging (Philips Sports Club) also originated during this time. After production was moved to Asia in the 1990s and the headquarters relocated to Amsterdam in 2001, Eindhoven was not left behind as an industrial wasteland. Instead, it reinvented itself as the Brainport region, with ASML as a notable Philips spin-off and a global player in lithography machines. Former Philips CEO Gerard Kleisterlee points out in an interesting article in a local newspaper how important the historical constellation has been:
Een opvolger van Philips en ASML? Vergeet het maar, waarschuwt Gerard Kleisterlee (A successor to Philips and ASML? Forget about it, warns Gerard Kleisterlee)
https://archive.ph/QgOVK
Returning to my argument, all these cases point to path dependence and agglomeration as the real engine, and that this works just as well in a fragmented parliamentary system as it does in a federal one.