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In the United States we have the two-party system unlike many other nations, including Britain, Germany, Israel, and many others. Multiple parties ultimately results in forced cooperation between multiple parties in order to create a coalition to govern.
Why do we have only two parties in the US government?
What are the advantages of a two-party system over a multiparty system?
As Michael WS points out, a 'first past the post' system (which the US has) encourages a two party system. However many other countries also run a 'first past the post' system without such a strong two-party emphasis. The UK and Canada are two examples where first-past-the-post allows for multiple parties in the legislature. The US has a few other systems which make two-parties even more likely.
The Presidential System. Giving substantial power to a president who is directly elected (more or less) encourages two parties. There is virtually no chance that a third party could capture the presidency, and even running as a third party disadvantages the candidate who is closest to your views, making it more likely that the person you least agree with is elected. Note that the presidential election is first-past-the-post at two levels - you have to be a majority at the state level to get on the scoreboard (in most states), and then get a majority of votes in the electoral college.
The Staggered Senate Elections The fact that each state elects only one senator at a time means its an all-or-nothing proposition. All the same reasons for not running a third candidate for president apply almost as much to the Senate.
The Primary System It is at least conceivable that there are House districts where a majority of voters would vote for a Libertarian Party, or a Green party candidate, or some other non-mainstream party, over a typical Republican or Democrat. Such things happen in other countries. However for candidates with those beliefs, the primary system ensures that rather than stand as a 'Libertarian party' or 'Green party' candidate it is better to attach yourself to one of the big two parties, stand in a primary and become their candidate. This gets you access to the fundraising and campaigning organization of the big party. (The lack of effective limits on campaign spends also makes this a more attractive approach than it might in other countries) And if your policies are popular with the electorate then the party will probably approve you.
The two party system is reflective of our system of voting. Major parties have no incentive to change this. The advantage of keeping the system is for those with power stay in power.
The two party system in the US is not by design. It has been hypothesized that plurality voting (first past the post) devolves into two party systems.3 This is called Duverger's Law after the French sociologist Maurice Duverger.
Here is a description from wikipedia:
Duverger's law suggests a nexus or synthesis between a party system and an electoral system: a proportional representation (PR) system creates the electoral conditions necessary to foster party development while a plurality system marginalizes many smaller political parties, resulting in what is known as a two-party system.
This video gives a brief description of the problems with First Past The Post Voting
There are some advantages, when compared to extreme cases in the multi-party spectrum.
For example, Israel has had 2 elections and still hasn't managed to choose a PM because no stable coalition has been possible so far between parties that dislike each other. For a while, Italy's PMs averaged 1.5-2 years in their job.
Multi party systems, depending on the circumstances, can also degenerate into horse trading, government pork and kingmakers parties. This is when a small party is needed to give the governing party a parliamentary majority. In that case, a small party can sometimes exert outsize influence on policy by insisting on particular treatment of something, even when the majority of voters are not sympathetic.
In BC, we've recently had our 2, or 3rd, referendum about moving away from first past the post voting. Guess what? Despite a whole lot of online claims of their moral superiority by people fond of proportional representation, the referendum came out more than 60% in favor of keeping things as they were.
Note also that the US isn't quite as much an outlier as all that: France for example pretty always elects presidents from either the center left Socialists or the center right party (Macron being an exception). Canadian elections generally either get a Liberal or whatever the center right conservative party calls itself, although minority governments do happen. UK elections: Labour or Conservatives. So, in practice, these countries don't have that much variability in their core parties.
Two parties in the poilitical system creates a duopoly... which if it were in any other part of the economy, the government would be trying to get it broken up as it being too close to a monopoly.
The result of a dupoly is more clear than ever -- both parties are becoming more and more extreme. It will only get worse before it fixes itself up.
Practical feasibility in a pre-industrial society
This is it. This is the reason why the US and England have this kind of system. Simply because it is practically feasible in the constraints of a pre-industrial society, where messages have to be relayed by horse or at best a telegraph line.
What benefits does it have now? Well, as bert2000's answer points out, its very suited to keep these two major factions in power and stabilizes the system as a duopoly, which is neat for those two parties, because they can largely ignore any opposition other than each other. What good it does for the people? Who knows, they don't have a choice anymore
