Innovation Deficit Disorder: A Diagnosis for a Sick Economy

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

REUTERS

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.

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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.

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.

Despite these alarming trends, too many policy elites have urged us not to fret, arguing that the United States is still strong in "innovation." But manufacturing and innovation are linked. Much of manufacturing (think semiconductors, drugs, medical devices, aerospace, and instruments) is high tech. Moreover, losing high-tech industry (the U.S. has run a trade deficit in high technology since 2000) leads to the loss of the upstream R&D and design jobs as well. Moreover, as a landmark study by ITIF, The Atlantic Century II: Benchmarking EU and U.S. Innovation and Competitiveness, showed, we are rapidly losing ground, ranking 43rd of 44 nations or regions in the rate of progress on 16 innovation-based competitiveness indicators (such as the growth of corporate and government R&D, venture capital, new businesses, productivity, etc.)

To deal with this near-death experience, we need to do more than tinker around the edges with a few tax credits for job creation or a few tweaks to reduce the growth of regulations. We need to marshal public and private resources to revitalize our innovation-based competitiveness. This is what our top competitors are doing and it helps explain why other countries, notably Germany, have emerged from the recession healthier.

Rather than restraining technology programs, such as NIST's Manufacturing Extension Partnership, which have been quite successful, we should fund them more robustly. We should emulate the best practices of other countries, such as Germany. It is invests some twenty times more than we do (as a share of GDP) in industrially-relevant, applied research, through its Fraunhofer system, which is made up of some 60 research institutes and 18,000 employees, and works with universities, private companies and government agencies to enhance Germany's global competitiveness in fields as diverse as life sciences, manufacturing automation, and materials and components.

We also need to make sure we have an adequate supply of STEM (science, technology, engineering and math) workers and the skilled technicians needed to work in advanced factories and technical industries. We should not be cutting education and training programs at a time when other countries are aggressively preparing their students and workers for success in value-added, high-end jobs.

Instead of fighting over taxes on the wealthy, we should compete with countries that are using their tax codes to encourage innovation and R&D in globally traded sectors. This means expanding, not cutting, tax incentives for investing in R&D and new machinery and equipment. Finally, the United States needs a trade policy that stands up to countries that demand we export jobs and technology as the price for market entry. The United States, in partnership with other leading countries, needs to take a hard line against growing innovation mercantilism, in which countries, such as China, bend or break trade rules to gain an unfair advantage.

By now it should be clear that economic policies over the last 20 years have weakened the U.S. economically and failed American workers. We need a new innovation and competitiveness strategy that invests in technology and talent and overhauls our tax and trade policies for today's highly-competitive, knowledge-based economy. We cannot delude ourselves into thinking that the equivalent of two aspirin and good night's sleep is all we need. We need more radical treatment that will boost jobs and confidence in the short run, and boost prosperity in the long run.

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