Can the US sustain its competitive edge?

This episode of the McKinsey podcast, hosted by Lucia Riley, features Eric Kutcher, McKinsey's Chair of North America, and Olivia White, a senior partner, discussing the United States' economic competitiveness as it approaches its 250th anniversary. The conversation, adapted from a McKinsey Live webinar, delves into the challenges and opportunities facing the world's most powerful economy amidst geopolitical shifts and technological disruption. The discussion begins by acknowledging the US's remarkable transformation over 250 years and its current standing as the world's most competitive economy. White highlights key data points from McKinsey's research: the US accounts for 26% of global GDP with only 4% of the world's population, and American firms make up 59% of the top 100 companies by market capitalization. While these figures are impressive, the research also reveals nuances. For instance, while the US leads in R&D expenditure, particularly in Generative AI, its share of R&D spending (around 51%) is less than its share of top firms by market cap. This prompts the question of whether current investment levels are sufficient to maintain its competitive edge. White further elaborates on the dynamism of US companies, explaining that the success isn't solely attributed to a few giants but also to a broader ecosystem. US firms, even smaller ones, demonstrate greater dynamism than those in other economies, growing faster when productive and disappearing more quickly when not. This constant creation of new firms is intrinsically linked to innovation, a hallmark of the US economy. Kutcher, who engages with CEOs and boards daily, acknowledges the shifting and less stable competitive landscape. He notes that while the US has historically held dominant positions, these are now being contested. However, he remains optimistic, emphasizing that the underlying values of the US economy—its entrepreneurial spirit and problem-solving ethos—provide a strong foundation for future success. He believes that the US has a knack for finding solutions and that many future leading companies are likely to emerge from the US, even if they haven't gone public yet. Despite this optimism, Kutcher stresses that this future is not guaranteed and requires significant effort. CEOs are currently grappling with immense change, with Artificial Intelligence (AI) being the top concern, followed closely by geopolitics. The level of uncertainty in global affairs has forced business leaders to become more adaptable, navigating multiple shocks annually. Kutcher advises CEOs to view this as a "reimagined moment" to fundamentally rethink their businesses, a task that only they can truly drive. He also notes that this period presents both inspiration and fear, as the established advantages of companies are no longer guaranteed. The conversation then pivots to areas where the US's historical strengths might now be liabilities. Kutcher points to critical obstacles that need to be overcome. One significant example is infrastructure, particularly energy infrastructure. He notes that while there is substantial capital allocated for projects, permitting processes can be a bottleneck, delaying crucial investments. Another area of concern is the education system. The US, once a global leader in education, is no longer achieving the same outcomes, especially when compared to the number of engineering graduates in countries like China. Kutcher questions how the US can compete in an engineering-intensive future with a significantly smaller pool of engineers. The issue of debt levels is also raised as a significant challenge. The US has struggled to reduce its debt through traditional means like cost reduction or budget balancing. Kutcher questions whether growth, potentially driven by AI-induced productivity gains, can help manage this debt. He suggests that the future remains uncertain and that solutions might come from both the private and public sectors, though collaboration between them appears to be diminishing. The research identifies five imperatives for the US to move forward. The first is "AI fluency." This encompasses two aspects: leading in AI innovation and implementation, which requires funding, infrastructure, energy, and skilled personnel, and ensuring that all citizens can participate in the AI-driven changes. This participation hinges on widespread education and adaptability to a new societal operating model. Kutcher adds to the AI fluency imperative by highlighting the erosion of manufacturing capabilities. While the US remains a significant manufacturer, it has lost considerable market share through outsourcing. This decision, while potentially keeping inflation low and goods accessible, has also eroded the middle class. Beyond job losses, the decline in manufacturing impacts national security and the ability to control outcomes in critical areas like chip production. Rebuilding this know-how and skill base is crucial for future competitiveness, though it's acknowledged that the US cannot realistically manufacture everything due to labor constraints. The discussion then turns to the imperative of sustained investment, particularly for AI. The good news is that significant domestic and foreign investment is flowing into the US for AI-related initiatives, with major tech companies substantially increasing their R&D and capital expenditures. However, the challenge lies in maintaining this investment over the long term. This requires confidence in the US government's trustworthiness and its ability to manage debt and control interest rates. The fact that annual debt repayment now exceeds defense spending is highlighted as a concerning trend. White suggests that besides cost-cutting, revenue generation through growth is another avenue, and AI could potentially create a virtuous cycle by boosting productivity and enabling debt repayment. Kutcher adds that while there's ample capital, companies are increasingly taking on debt beyond their operating cash flow to fund these investments, a dynamic that needs careful monitoring. Infrastructure is also identified as a critical imperative. The US faces deficits in aging infrastructure, including bridges, highways, and especially energy systems. The historical investment levels in infrastructure are no longer sufficient for current needs. The lack of a single US port in the global top 50 is cited as an example of the infrastructure deficit. There's a need for long-term thinking and significant investment to see the benefits of improved infrastructure and manufacturing know-how, particularly in areas related to the physical world. The disparity in engineering graduates between the US and China is reiterated as a stark indicator of the need to rebuild skills and a focus on physical capabilities. The hosts then move to audience questions, asking what key questions CEOs and boards should be demanding answers to. Kutcher suggests understanding the business as an "AI-first" entity in five to seven years, identifying reimaged end-to-end workflows, and assessing tech fluency within leadership. He emphasizes using AI to gain unique insights and highlights the potential for "red team, blue team" exercises to challenge traditional decision-making. CEOs need to consider what they are recognizing and rewarding to drive change, address organizational fears about job displacement, and orient the business towards growth and efficient resource reallocation. Olivia White adds that looking back over 250 years reveals the importance of long-term trends and the need to look beyond short-term volatility. This perspective is crucial for navigating the current moment and planning for five to ten years ahead. The episode concludes with thanks to the guests and a reminder to listeners to find the transcript and the McKinsey Insights app on mckenzie.com.