Innovation Deficit Disorder: A Diagnosis for a Sick Economy

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The first steps toward a US innovation agenda that can unite the country and save the economy

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More than two years into the recovery from the Great Recession, job creation is barely keeping pace with population growth much less putting millions of people back to work. Despite their unanimous declaration that job creation is their top priority, public officials seem to have run out of answers and/or political will to address the matter. The cold reality is that the U.S. economy has been experiencing something akin to cancer for which we need innovation chemotherapy. Yet most economic policy doctors have been prescribing ice packs, bandages and aspirin.

Where great ideas really come from. A special report

The prevailing, textbook assumption is that depressed demand is the culprit. But when the largest stimulus package in U.S. history -- the $787 billion American Recovery and Reinvestment Act -- couldn't drive recovery, it suggests that more than weak consumer demand was the problem.

According to another school of thought, if the recession was the result of a financial crisis, albeit of historic proportions, as Ken Rogoff and Carmen Reinhart argue in, This Time Is Different: Eight Centuries of Financial Folly, then we need to just suck it up while we wait the long time until balance sheet integrity and fiscal solvency are restored. But why were we so susceptible to a near fatal case of debt flu in the first place? Private market purists, meanwhile, contend private-sector job creators are paralyzed by uncertainty about regulatory and tax policy - as if previous laws were written in stone and past elections never led to policy changes. Still others say we have plenty of jobs, but our workers are too unskilled for them. Tell that to the historically high number of college graduates and even engineers who can't find full-time work.

Defeatism is easy, but useless. In 1899, the US patent chief complained that "everything that can be invented has been invented."

The flaws in these diagnoses and the corresponding inadequacy of their respective solutions point us in the direction of the real issue: the innovation and competitiveness deficit. But even here, we find analytical shortcomings. Tyler Cowen, a George Mason University Professor, in his e-book, The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better, alarmed many this year by warning that, after utilizing vast tracts of land, educating people and, of course, harnessing the power of technology, we appear destined to stagnate until the next big technological transformation emerges.

That argument smacks with the warning of Charles H. Duell, Commissioner of the U.S. Office of Patents, who famously asserted in 1899 it was time to close his shop because, "everything that can be invented has been invented." While it is true that technologies tend to play themselves out at some point, leading to slower periods of growth, there is no evidence we are there yet with technology. For example, new businesses and business models are emerging as mobile broadband service is more widely adopted. There is more ahead in technology than Facebook upgrades. Other countries are using technology in a variety of useful ways from smart grid, to intelligent transportation systems to health IT. We just aren't doing that here.

There are others who embrace the flipside of Cowen's thesis. MIT professors Erik Brynjolfsson and Andrew McAfee assert in a new a chillingly-titled e-book, Race Against the Machine, that technological change, far from playing itself out, is escalating so quickly that it is making workers obsolete. If that were true, how was it that machines allowed us to enjoy an unemployment rate of below five percent just four years ago? Or how could productivity average 3.1 percent per year growth in the 1960s while unemployment averaged 4.9 percent, but during the 1980s productivity was a sluggish 1.5 percent while unemployment rates averaged 7.3 percent. The answer is clear: there is no negative relationship between productivity rates and unemployment. In fact, studies by the OECD and others demonstrate that productivity's positive impact on economic growth and employment. Indeed, it is not too much technology we need to fear, but too little.

IT'S THE INNOVATION, STUPID

What all of these diagnoses are missing is an understanding of the loss of U.S. innovation, competitiveness leadership and the origins of the devastating decline in the U.S. manufacturing sector in the last decade. In the 1980s, U.S. employment expanded by 19 percent and in the 1990s by 20 percent. During the same periods, manufacturing employment fell seven percent and one percent, respectively. But between 2000 and the peak of employment in January 2008, the number of jobs grew just 5.4 percent, while manufacturing jobs declined by a whopping 32 percent. This is a drop even greater than that during the Great Depression! No wonder, job creation was sluggish then and is anemic now. With manufacturing's multiplier effects, its decline has exacerbated overall job loss, slowed overall economic growth, led to larger trade deficits, and eroded faith in the United States among consumers, investors and even other nations - much the way a cancer threatens the entire body.

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Rob Atkinson is founder and president of the Information Technology and Innovation Foundation, a Washington-based think tank. More

Rob Atkinson is President of the Information Technology and Innovation Foundation. He is also the author of "Supply-Side Follies: Why Conservative Economics Fails, Liberal Economics Falters, and Innovation Economics is the Answer."
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