How Innovation Plays Second Fiddle

This was a post on the Doing What Works project’s competitiveness blog.

The United States is falling behind in international economic competitiveness, according to recent research by the Information Technology and Innovation Foundation. While our 2009 Atlantic Century report ranked the United States sixth of 40 nations in “innovation-based competitiveness,” we are dead last in the rate of progress over the last decade. That poor performance is finally leading to action. Sens. Mark Warner of Virginia, Amy Klobuchar of Minnesota, and George LeMieux of Florida this year introduced legislation requiring the White House to develop a “national competitiveness strategy”—and now CAP has released an important report urging the federal government to rethink how it develops and coordinates competitiveness policy.

These are important steps. At the end of the day, however, any innovation and competitiveness strategy will be shaped and implemented by the administration in power. Economic policy today is the purview of the Treasury Department and its allies at the White House’s Council of Economic Advisers and Office of Management and Budget. Dominated in both Democratic and Republican administrations by financially oriented neoclassical economists, these organizations largely ignore the real economy in favor of the financial one and believe that in the absence of “market failures” government action only makes things worse. Unless this perspective changes, any national innovation and competitiveness strategy will at best be implemented at the margins of overall national economic policy.

We only have to look at the United Kingdom to see what happens when neoclassically oriented treasury departments have responsibility for national economic prosperity. That country’s precipitous industrial decline in the 1960s and 1970s came at a time when economic policy dictated by Her Majesty’s Treasury. It cared more about factors such as inflation, balance of payments, savings rates, and preserving the value of the pound sterling than it did about the United Kingdom’s actual industrial capability. Other ministries might have wanted to help the “real” United Kingdom economy, but they were always shunted to the sideline by the big boys at Treasury. In his The Wasting of the British Economy: British Economic Policy 1945 to the Present, economic historian Sydney Pollard writes:

We are looking for principles held by British policy makers but not by others—except those, like the United States in recent years, that have shown equally dismal economic results…There is one and only one principle which will fit the bill: it is the principle of concentrating first and foremost on symbolic figures and quantities, like prices, exchange rates and balances of payments, to the neglect of real quantities, like goods and services produced and traded. In particular, the subordination of one to the other is such that whenever there is a clash of interests, the real must be sacrificed to the symbolic.

Unfortunately, the United Kingdom and United States are cut from the same cloth in this regard. As long as Treasury, CEA, and OMB call the shots, U.S. relative industrial decline, if it is even acknowledged, will be seen as a natural response to market forces. A strong dollar will be the official government policy, budget balancing will trump investing in innovation and competitiveness, and any kind of manufacturing strategy will be seen as inappropriate “industrial policy.” For these officials, the actual industrial composition of the U.S. economy is irrelevant. As former CEA head Michael Boskin put it: “potato chips, computer chips; what’s the difference?”

At the end of the day, neoclassical economists in London and Washington not only offer little in the way of solutions, they actively work against them. It’s too late for the United Kingdom to resurrect its industrial capabilities, but it’s not too late for us. Unless we limit the U.S. Treasury to fiscal policy alone, we are unlikely to create and implement the kind of national innovation and competitiveness strategy our country needs.

Rob Atkinson is president of the Information Technology and Innovation Foundation.

This was a post on the Doing What Works project’s competitiveness blog.

Read other posts from the blog:

• What’s the Best Way to Promote Our Future Competitiveness? by Sarah Rosen Wartell and Jitinder Kohli
• An American Innovation Agenda by Kevin Sharer
• The Infrastructure Edge by Edward Rendell
• Feedback on the Center for American Progress’s "A Focus on Competitiveness: Restructuring Policymaking for Results" by Bruce Mehlman
• Role of Federal Government in Creating a Competitive Economy by Mark Levinson
• Accelerating Job Creation and Competitiveness from the Bottom Up by Dan Carol
• Bending the Curve as Key to Our Success by Randall Stephenson
• To Combat "Growth Deficit," Invest in R&D While Cutting Elsewhere by Laura D. Tyson
• How to Win the Race for Jobs by Jennifer Granholm

 Reader’s comments for this post:

1. John Abodeely

   on 02 Dec 2010 at 1:13 pm

   This is a very compelling piece! Thanks for posting it.

   I have one question, which I’m sure is naive. I’m not an economist. I work in public education policy and programs.

   I’m wondering which products you believe are currently our best and which type of products, you believe, the feds should see that we make more of.

2. Rob Atkinson

   on 02 Dec 2010 at 4:37 pm

   I don’t think that the issue is about what particular products the feds should target, but rather to focus on restoring US competitiveness in advanced manufacturing. It’s clear that we have strengths in areas like semiconductors, aviation, life sciences, and should have strengths in areas like clean energy, robotics, autos, etc.

   So yes, we need a national strategy that looks at how we are doing in some of these key sectors and where are we strong and weak, and what the policy levers (e.g., tax, regulation, tech policy, etc) to drive competitiveness.

3. Michael F. Sarabia

   on 04 Dec 2010 at 11:25 pm

   I worked in Hi Tech from computer programming to Artificial Intelligence, in aircraft from loading and wind tunnel testing to the Flight Management Computer, even worked in laser weapon development. The thing I liked about science in the leading edge is that it is full of surprises. Building airplanes is an old shoe for companies like Boeing and Aerospatiale yet each lost around 4 Billion while constructing the first one, the last 3 years. Both companies.
   Only those unfamiliar with research and invention would ask for a government plan for innovation.
   Neither Apple nor Intel are waiting for such help.
   But, all American manufacture need to lower production costs if the nation is to survive. Sure, Apple can do it with innovation but, they are not fools, they use whatever is the most cost effective way to produce their latest gadgets and if you disagree, remember Apple is about to become the first $100 Billion company. You might think they could learn from other companies, I believe it is the other way around.
   Another factor to remember. In the real world, anyone may have a great idea but it is the one that sells enough of them quickly (read: at a low price) that establishes the trend others follow.
   Sure, anyone can say “Study the process, develop a plan and tell others what to do.” I think that would be waste.
   Take one simple example: Most assembly lines use people to do repeated actions, like robots. Japan has been running a factory with no workers, for about 8 years, to produce a Universal Assembly Line Robot, sold worldwide but not used much in the US. Do we need to make a study to find out why we do not lower production costs with Robots, while the world does? Look at Big Box stores and see who made the radios, watches, CD players, TV, etc. You think it was with cheap manual labor?
   The Air Force and the Army are rapidly developing drone airplanes, trucks and tanks. None at a commercially viable price.
   Google is currently testing an unmanned automobile, should we help or ignore that effort? Is there a way to tell if it will work?
   Remember, the first global portable phone (VP Gore placed its first call) became a failure but, recently, the production of replacement satellites, and launching, brought it back to life at a lower cost.
   Nobody predicted its failure, I sure did not. Nobody, until a year ago, planned satellite upgrade, after it was cost-effective.
   All I am saying is that Research does not predict success.
   Can anyone tell if the F-35 will ever fly off the high mountains in Afghanistan in combat?
   The government ought not be in the business of choosing winners and losers, the market place and the battlefield decide best.

   But, government can lower production costs for ALL industry by making sure EVERY high school graduate, not going to college, has a marketable skill by the time he or she graduates. All other plans may be good but without the reduction of production costs, we are, as they used to say where I come from “whistling in the dark”.
   Can we compete with China labor costs? We don’t have to, all we need is to develop automated assembly lines that are operated by Low Income Workers, here like they are over there.
   By the way, go visit a “chip” assembly line, anywhere, and you will not see any workers using a microscope doing the work. The precision required is far more than is humanly possible.

4. Frank T. Manheim

   on 07 Dec 2010 at 3:32 am

   The above commenters all have valuable insights and experience about aspects of the competitiveness situation, but a critical, fundamental, and readily documentable factor is overlooked. In the United States conventional manufacturing and industry face disproportionate barriers and inhibitions with respect to other economic activities (finance, retail sales, imports, communication, entertainment, foreign investment, etc.) and in contrast to conditions in other advanced nations.

   1 . The 1970s U.S. environmental laws – unique among all advanced nations, place special costs, labyrinthine regulations and procedures, selectively on manufacturing, industry, and land use.

   2. Those laws transferred leadership in creating detailed regulatoryu policies from scientific and professional agencies to Congress. Political polarization has made it difficult or impossible to reform regulatory systems created to deal with conditions 35 and more years ago and very different from those today.

   2. Key laws enforced by EPA give no legal standing to values other than environmental protection in enforcement by EPA and other agencies. Thus, unlike sustainable development policies adopted by all 27 EU member states, US laws forbid or inhibit economic R&D or assistance that that could help maintain productivity to offset the cost of increased environmental standards.

   3. The 1970s laws introduced unique provisions (compared with all other advanced nations) allowing citizens and citizen groups to enforce laws by suit in federal court court, and to legally challenge proposed operations otherwise approved by state or local bodies. This has added special legal and political risks activities affected by the environmental laws.

   4. The language of the laws themselves – mandating “compliance” with uniform, detailed and specific requirements imposed by central regulatory agencies, includes rigorous punitive measures referring to “noncompliance”, “violations”, “violators”, “adjudicatory hearings”, etc offer both real sanctions against certain economic activities as well as a stigma that is absent from regulatory systems operating in European and Japanese competitor nations.

   5. The U.S. system of higher education – especially research universities give highest prestige and rewards to basic research, through hiring, promotion and tenure policies largely based on peer-reviewed publication. Applied science and technology, as well as commercial applications have thus long had a lower status.

   6. Economists and opinion leaders have regarded conventional manufacturing and industry as activities relegated to the past, rather than the future. In the Presidential primaries leading up to the election of 2008 even the Republican candidate, John McCain said to Detroit autoworkers that he would be honest with them: their jobs were not coming back (he would propose retraining for new career options) .

   In the aftermath of the 2008 crash those interested in Europe saw policies very different from those in the U.S. at work. Virtually no European nation other than the UK has abandoned their traditional industrial strengths. During my visit to Sweden in August the papers noted a 70% increase in exports compared to the previous year- led by machine tools! Americans have seemed to forget that any renewable energy equipment to be mass produced requires machine tools. Germans now sell to China – not the reverse as is the case for the U.S. And imports of goods and services t were said to make up >70% of outlays from the Recovery budget allocated to renewable energy innovation and development.

   es do not. T e relationships with industry tend to be regarded as undesirable influence by environmental organizations.

   under and to deal with conditions 35 and more years ago. have put a psychological stigma on conventional manufacturing and industry in the United States.

   Think of the Presidential primaries. President Obama spoke exclusively of “green energy” and green industry, never of “manufacturing”. Even John McCain said to Detroit autoworkers that he wouldn’t lie to them. Those jobs weren’t coming back and he proposed to retrain them for new opportunities (which opportunities)

   The majority of economists and leading political figures including President Obama himself have tacitly assumed that the above areas are “done for” in the United states and that services would somehow compensate for their decline.

5. Frank T. Manheim

   on 07 Dec 2010 at 3:38 am

   [Infelicities in the foregoing comment! It was sent prematurely, leaving some draft language trailing behind. Please disregard comments after "renewable energy innovation and development". I also acknowledge grammatical glitches.]