This is the McKinsey Podcast, where we help you make sense out of the world's toughest business challenges.
I'm your host for today, Lucia Rehley.
Most big birthdays bring on a bout of introspection, and the United States is about to have a milestone 250.
But in the face of geopolitical upheaval and technological disruption, Can the world's most powerful economy sustain its advantage?
McKinsey's chair of North America, Eric Kutcher, and senior partner Olivia White joined to discuss the challenges and opportunities ahead.
This episode was adapted from our McKinsey Live webinar series.
Okay, let's start with some context.
Yes, the US has successfully transformed itself over the past 250 years.
But candidly, when folks hear that top line that the US is the world's most competitive economy, it's not like a shocker.
Most of us are aware of the history despite our declining education scores.
So Olivia, you have spent months, months deep in the research for this report.
I would love to hear what the data revealed that maybe you weren't expecting, and more about kind of the picture that emerged beneath that big blockbuster headline.
Well, as you said, there were a couple of points that qualitatively I was absolutely expecting, but they're still helpful to see in the real like numerical flesh.
So the 26 GDP versus 4 population, and then the 59 of top 100 firms by market cap that are American.
So that really gives us sort of view, at least through this particular company.
Economic competitiveness lens of where the US stands right now.
Even though, looking at the numbers before you go and you talk about some of the things you mentioned in your introduction Lucia, You start to see there's some areas where, on the one hand, the US is doing incredibly well, like the role that we've played in Gen AI and in creating notable AI models.
So to our account, about 51% are R&D expenditure, which keeps pace about with our GDP.
Those fractions are less than the 59% of 100 firms by market cap.
So it makes you think okay, numbers are big compared to population, but are they big enough if we want to retain the sort of competitive position that we're in today and that we've been in for the past century plus?
And that was kind of our starting point for all of this.
And Olivia, the data on U.S. companies is pretty remarkable, obviously.
Say a little more about the connection between firm level success and in other words, is US economics straight the story about a few good companies or is it more broadly distributed as a phenomenon?
Yes.
It's really a story about both.
I mean.
So US has had the lion's share over half of the market leading firms.
Even if you just look at the top 10 firms, over the past century, like in 2009, the top 10 were American firms.
So you find that US firms are actually more dynamic all the way down to smaller firms than those in other economies.
And that means they grow faster when they're productive.
They disappear faster when they're not productive.
There's a lot of creation of new firms linked to the sorts of innovations that you talk about.
So you really get a hallmark of both of these things the top firms and then the dynamism that runs throughout.
Interesting.
Okay, Eric, let's get you in.
You are talking to CEOs and boards across North America every day.
As the competitive landscape shifts and becomes more less familiar, less stable.
Some of the ground the US has historically owned is being contested in ways that should presumably give business leaders some pause, as we've been alluding to.
Where do you see the most significant pressure points?
Yeah, I do want to go back first to a little bit of what Olivia was just talking about, because I think that chart is a big reason why there should be a lot of hope, right?
The fact that there is that much change in that top 10 list and the fact that the US has maintained kind of its position on that topic or frankly, in hampstead over time, i think speaks to the underlying values that have allowed the us economy to be what it is, back to that 26 despite the four, And I think is the reason I just don't bet against the US right.
I really do think if you believe the underlying values, kind of the entrepreneurial spirit, the problem solving, or if you believe in those things as core to who we are, then you would believe it would continue.
And I think you are already seeing that, because if you project forward, you can almost see some companies that'll be on that list as we go forward, that aren't even public yet.
That all started in the US, right.
And so I do think it is a real point of what the future will bring.
But it is not a foregone conclusion, right?
It is not a guarantee.
There's a lot that has to happen to enable it.
If you ask kind of what's on the mind of the CEO as it relates to this right, I think there is.
This is just a moment of immense change, right.
And I think, if you know, I get asked this question kind of what's on the mind of the CEO, and I say, you know, topic number one, two and three is AI.
And then topic number four tends to be geopolitics.
Right.
And the geopolitics is a level of uncertainty that they've just had to learn to live with.
You know, I think I got asked this question not that long ago.
And I said, I think the CEOs today are just they're more battle tested than ever before.
It used to be we thought we couldn't handle more than one issue. or one shock.
And now it's multiple shocks a year of unpredictability that we have to navigate through.
And so I think the CEOs have learned to navigate through the moment as opposed to to the moment.
But the thing on their mind is, how do I think about labor?
How do I think about capital?
How do I think about the level of investment?
How am I thinking about the return I'm going to get?
And the thing that I keep reminding them is this is their reimagined moment.
This is their moment now to really think about the business very differently than they ever have before.
And only the CEO really has the right to do this.
And it is a moment that should be both a source of inspiration but also a moment which kind of does create some level of fear.
I was literally yesterday with the top 250 of a leading bank.
And we talked just about this.
We talked about the fact that the competitive landscape that they are playing in is changing.
And their position and the moat that they've had around them does not hold going forward.
But boy, what an incredible opportunity to think about it as the mindset of an attacker, as opposed to the incumbent, given the fact that this technology provides them the access to really rethink that business in a profoundly different way.
Super interesting.
Eric, let me follow on that.
So you made the point that we shouldn't bet against the US and that the US has this incredible entrepreneurial spirit of dynamism and so forth.
But the research is making a point that some of America's historical strains, some of the areas where we have historically excelled, are now becoming liabilities.
Speak to us a little bit about that and what the implications are.
The reason I am optimistic is we have seen through this research and, by the way, I think what we've intuited is the US finds a way, but there are real obstacles to overcome and Olivia should expand on this.
I was with one CEO of a very famous AI company, and he would say electrons or electricity is the currency of the future.
And we know that our infrastructure is not where we need to be.
That is an example of a real level of investment.
By the way, we're sitting there with 15 trillion of projects that have already got capital and are waiting for permitting right.
We have to find a way to accelerate the investment that wants to be made to actually enable us to continue.
That is an example of what has to happen.
Another example that we have to ask ourselves is the education system.
But I think you sort of joked about this a little bit ago.
The reality is we had the world's best educational system for a long time.
We do not today.
The outcomes are not where they should be.
That may or may not be true at the university level.
But let's also compare the number of engineering graduates in the US to the number by the way, not even talking about where they're from just the number of people who will graduate from US universities with an engineering degree each year, And compare that to China.
I think we're about 10% and I may be a bit generous in that.
And so how do you compete in a world that has been so engineering oriented, right?
And expect to continue to create those innovations and yet have 10% of the available engineers.
That's a real challenge for us to overcome.
The question about debt levels and what that means for the overall US economy is another real question, right?
That is another thing we have to overcome.
And, by the way, we have proven that we can't do it so far through any form of real cost reduction from any form of real balancing of a budget.
And so if you can't do that, What are the other means to do it?
Is it going to be done through growth?
And do you believe that AI gives us the productivity to allow us to kind of get the growth that allows us to effectively pay the bills that we have going forward?
And so the future is far from certain.
It's far from certain.
I'm just optimistic that We tend to find a way, right?
We tend to find a way.
And sometimes that way doesn't come from government.
It comes from business.
Sometimes it'll come from government.
I do think the collaboration between the two is less than it has been in the past.
Even if you look at research dollars and I think you again referenced this the research dollars that we are spending today is not the same as it might have been going back.
Part of that is we are reducing funding at the federal level.
We are not as collaborative between federal and business, and we are relying more on business.
Does that sustain us going forward for the level of scale that is required?
Those are the types of things that we have to overcome.
In the research.
You outlined five imperatives to move us forward, to get us to the next phase, the next chapter of American competitiveness.
The first one, as I recall, is AI fluency.
Speak to us a little bit about that and what it means.
So this is a sort of coupled things.
The first is to be in a position such that the US can lead as an AI innovator and implementer, both in the world of software but also in the world of physical AI.
And that's going to require a certain sort of stance.
It's going to require funding.
It's going to require infrastructure.
It's going to require energy.
And it's going to require, as you say, people that have the fluency in AI or the engineers who have the skills that Eric was talking about.
At the same time, of course, part and parcel of really being competitive, and the reason that you want to be competitive is that you want to do it for the people in the country.
You want them to get good incomes.
You want those to be evenly distributed.
And the way that that's going to have to happen is for everybody to be able to participate in what the change will be.
And the only way you can participate is if you're fluent in what the new vocabulary is.
And this is why education, but education coupled to this new world And coupled to, you know, not just the skills but the way of thinking about how we're going to operate as a polity, as a society, in this new world, is really, really important.
And hence that AI fluency carries, you know, as you highlighted, it carries a lot of weight.
Eric, anything to add there?
The.
It's funny.
I was reflecting a little bit on some of the things that we have maybe eroded or put us in a less the less strong position as we kind of look forward.
And Olivia, you're talking a bit about the skills, but one of those skills is actually manufacturing, or certainly high end manufacturing.
And when you start getting underneath, what has sort of led us to the position we're in?
We are still, I believe, the number two manufacturer right.
But if you look at the share that we have lost, which was a real choice, right?
It was a choice to begin to outsource these things to other geographies.
And, by the way, you might argue that held inflation at lower levels and brought goods into a broader set of folks, but it did erode the middle class.
Right.
There's no question it eroded middle class.
So some of what we are seeing economically and some of the divergence in incomes is a result of the fact that we don't have those jobs any longer.
But more than even those jobs, the question is, let's get into factors like national security.
Let's get into factors like the ability to own kind of the outcomes as it relates to A.I.
We don't make those chips here anymore.
And if you said let's go try tomorrow, it's hard because we actually don't have as much of the know-how at the leading edge.
And so those are real questions.
When you start getting into...
What is it going to mean to be able to do things, whether it's the next generation of automotive?
We're not at the forefront of that anymore.
And it's as much a skill and know-how.
And so there is a real retraining and rebuilding of that if we want to be competitive.
I also think we have to be very thoughtful about the fact that we can't try in the US to manufacture everything.
Right.
That that is not going to be that we don't have the labor base.
And one of the things that's been amazing about the economy the last few years is we are seeing a declining labor base.
If you look most recently, what we are seeing is relatively modest job gain, job loss.
And yet we are not seeing a change in unemployment.
And that's a real indicator of where we are.
And that's a combination of we have less immigration.
And frankly, we have more retirements as kind of the baby boomer generation officially.
Those are real dynamics.
And so we have to figure out how to build that know-how is the other bit.
Interesting.
Okay Eric, you mentioned debt and not having been able to reduce that debt in the conventional ways, balancing the budget and so forth.
Obviously, to power AI, if we're looking to AI to juice growth...
We need massive investments to power data centers and to deliver on this astonishing potential that AI offers.
Does either of you want to say more about that imperative from the research perspective?
Yeah, sure.
So look, first, the so far good news, we've put a tremendous amount of money towards it.
And that money is money that's come from the U.S.
There's a lot of domestic investment, not least of which is coming from our companies.
And if you just look at The biggest tech companies, the amount of money that they have put, broadly speaking, towards RD is immense.
And it's increased by.
I want to say that Amazon has increased its capital expenditure and RD spending by a factor of almost 50 since 2010.
So, yeah, there's a lot going on.
And frankly, there's also a lot of foreign direct investment that's being committed to the US in precisely these areas.
That's the good news.
The challenging news and the thing that Eric was talking about, is that this needs to be sustained over time.
And the US needs to be the place to retain its competitiveness that people want to keep investing and keep putting their money.
And that requires a faith that by putting their money here, it will do well.
And part and parcel of that requires a faith that US government will continue to remain incredibly trustworthy and its debt will remain well under control and yields won't be too high.
And when you get a higher, when you get rising debt.
And we just recently, for example, have passed the point where our defense spending is now less than our debt repayment on an annual basis.
These are points where you say OK look, how do we figure out how to reduce that debt, in fact by quite a substantial margin, so that over the long term, we can ensure that we'll continue to be a place where people will want to put their capital to grow?
And the one thing I would say, Lucia, you know, there are two conventional ways.
One is cutting costs, but it also is a conventional way to raise revenues.
And so that's another reason why growth is both important, but also a potential real virtuous cycle.
In this regard,
Mm-hmm.
The only thing I'm going to add is and you know, this comes into the 50x I think was the number Olivia, you quoted in terms of the capital.
We're now getting to a point where we've had these pristine balance sheets of some of the largest tech providers and we're now getting to a place where we're starting to take on.
We're starting to spend capital beyond what is our operating cash flow, which means we are starting to take on more debt to pay for these things.
And, And I think we have to watch how this evolves and whether or not there is a you know, whether or not the overall economic equation continues to close as we go forward.
I believe it will, but we're not there yet, right?
And I think we are now in a real investment phase and question is how much.
And there's lots of reasons to believe we have to be in the investment phase right now, Given the amount of advancement in the underlying LLM models and, increasingly over time shifting more to infrared.
We have to balance and see how those things all balance out.
But that is another question is is the way you know, while there's plenty of capital coming into these things, how do we feel about that overall equation that is still to be determined.
Infrastructure, also a really hot topic in the media and also at least historically an imperative with bipartisan support. but requires investment on that side of the calculus.
Do you want to say anything about new and improved infrastructure as one of the imperatives in the research?
We have an aging infrastructure.
Whether you look at bridges, and whether you look at highways, or whether you look at energy, which is probably the most important, all of those areas are real deficits at this moment from a US balance sheet point of view.
And if you start to look at the percentage of GDP that we have historically invested in infrastructure, as we built this and you think about a useful life, We are living in a period where it will take real investment.
And the question is, do we have that investment capacity right now?
And so those are real questions that have to get overcome over time.
I do believe we can solve them, but it's not easy, right?
It's a massive level of investment.
I agree entirely.
I mean, we don't have a top 50 port, right?
None of the global top 50 ports is in the US.
Energy and infrastructure broadly is something that clearly repays.
So it's a matter of thinking long-term enough, given the sort of trajectory we're on, in order to both conjure and then ultimately see the benefits from these things.
There's a broad theme when it comes both to investment in infrastructure and also some of the manufacturing know-how, particularly in areas of the future.
A broad underlying theme around things physical here.
Eric also mentioned engineers, right?
China graduates 10 times more mechanical engineers a year than we do.
You mentioned skills, the ability to build.
There's a real shift in thinking here that's going to have to happen towards also thinking about the physical world.
Mm hmm.
Mm hmm.
Okay, let's turn to questions from the audience.
Suppose you were now sitting in the C-suite, sitting on a board.
Walk us through some of the key questions you would be demanding answers to.
Okay.
Yeah, I'd want to know kind of what this business is going to look like as an AI first business five to seven years from now.
I'd like to know what are the examples where you have really reimagined end to end workflows.
Remember, one of the things that's beautiful about these, these agents, is they don't know organizational silos.
They don't feel like they report to anyone.
And so how would you leverage and redesign these workflows in a very, very different way?
I'd want to know about tech fluency and whether or not the CEO and what are they doing to change kind of how they operate and how they problem solve.
Now, whenever I think of a problem, I think about what are the unique points of data that I can feed into the AI that will give me a unique insight that I didn't have before.
That a lot of the things in terms of the hypothesis, et cetera, that we use to really allow us to move quickly to the problem solving we don't have to do anymore.
So I'd be asking questions to the CEO, what are you doing?
How are you making decisions?
One of the things I talk a lot about CEOs is you have an immediate ability to run a red team, blue team on every strategic question.
You can run the red team being the traditional way that you would do it.
You can run the blue team if I give a very small set of folks only AI to solve the problem.
What comes out differently and how do I learn, how do I use that to change the organization?
I'd be asking the CEO.
In a world where recognition is the greatest form, I think, of forcing or enabling change.
What am I recognizing today?
What am I doing when I go out there to drive the change to the organization?
This is a very real change moment.
And at the same time, how do I address the fears of the organization?
There's a lot of people that are worried that AI is coming to change their job or take their job.
What does that mean?
How do you navigate this in a world where frankly, job loss is not a really attractive thing to work on?
So how do I kind of orient this towards making the business better, serving my customer better?
How do I get this to be much more growth oriented?
How do I get the resource reallocation to happen over what period of time?
Those are the questions that the board should be asking.
Olivia, anything to add?
Just in the spirit of the piece of work looking back over 250 years, it was a very, very good reminder of just the degree to which certain trends, or long-term trends, And looking through the volatility, even while you're prepared for it, is immensely important.
You see that, looking back, and it's clearly a moment where that's really really important looking forward.
So not just how are you going to respond if something goes wrong today, but how are you thinking about five years, even 10 years from today?
Okay.
Okay.
Unfortunately, that brings us to time.
This was a great discussion.
Eric and Olivia, thanks again for joining us today.
Thanks as always, Lucia.
You and I have a history of just running over.
I know.
I hear you have a hard stop, though.
I was told to be very strict.
Thanks so much for listening to the McKinsey podcast.
I'm Lucia Rahilly.
And I'm Roberta Fasaro.
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