America is no longer great, according to two prominent economists. In a new book, they present a compelling argument that the U.S. is rapidly losing its technology edge to China. The culprit is a lack of public investment in research and development, something not easily remedied.
Between 1947 and 1970 median family income in the U.S. doubled, but over the next 45 years it increased by only 20%. Why this is so is a mystery that economists have been trying to solve. Now two economists, Jonathan Gruber and Simon Johnson, who are both professors at MIT, in their recent book, Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream, write that the reason is because the United States government invested heavily in basic research and development in the earlier years, but the funding dropped off in the later years. And, Gruber and Johnson say, America can experience that kind of growth again – with more evenly distributed benefits, as in the earlier era – by greatly increasing targeted public investment in R&D.
In many ways this book is a natural follow-on to a book I reviewed in 2013, The Entrepreneurial State, by Mariana Mazzucato. In that book, Mazzucato showed that government provided most of the risk-taking investment that led to the bulk of the technological innovations of the last 70 years.
Gruber and Johnson reiterate and extend Mazzucato’s arguments. From 1940 to 1964, motivated largely by national defense concerns and mostly coming from the defense budget, U.S. federal spending on R&D increased by a factor of 20, reaching two percent of annual gross domestic product in the mid-1960s. It funded most of the innovations we take for granted now, which we often erroneously attribute entirely to private sector entrepreneurship.
For example, Gruber and Johnson point out, “the R&D behind the integrated circuit was largely paid for by the government” and “NASA and the military were by far the most important clients of the semiconductor transistor business in the early days,” providing a further subsidy to its development. They say that, “Almost everything about your computer today – and the way you use it – stems from government funding at the early stages.” As Mazzucato showed, this applies to the smartphone as well.
But, starting in the late 1960s, government funding for R&D declined to only 0.7% of GDP. The private sector, Gruber and Johnson say, especially venture capitalists, cannot and do not make up for this loss by taking the deep-pocketed investment risks in R&D that governments can take.
There are many reasons for the drop-off. The existential threats of World War II and the Cold War waned toward the late 1960s. Gratitude for defense-related funding cooled in academia with the Vietnam War, while gratitude for the work done by academics in science and technology cooled among other sectors of the populace. And then there was, of course, the increasing strength of the anti-tax and anti-government movements.
America is no longer great
The result, as Gruber and Johnson show, is that America is no longer as great as it was when it comes to leadership in scientific and technological research and development. It is losing its lead, especially to China.
Gruber and Johnson cite several areas in which China’s government-funded R&D has surged ahead of the United States. They cite some aggregate statistics, such as the fact that while China used to be way behind the U.S. in terms of numbers of patents and academic paper citations, it is fast catching up. But much more impressive are the specific areas they cite in which China’s R&D is outpacing America’s.
For example in the field of exploration of the last great, and largely unknown, repository of resources on earth, the deep ocean, China has surpassed the U.S. “Exploration,” the authors note, “has been carried out both by remote-operated vehicles (ROVs, unmanned vehicles with instrumentation that can collect samples while connected by a cable) and human-occupied vehicles (HOVs).”
For years, Gruber and Johnson say, the United States was the leader in exploring the deep sea. Its HOV reached its maximum depth of 6,500 meters in 2013. Its ROV, the Nereus, descended to 10,902 meters in 2009, but it exploded in 2014 due to extreme pressure. China has now taken the lead. Its ROV descended to 10,767 meters in 2016 and its HOV to 7,062 meters in 2012.
In the crucial area of clean (i.e. low-carbon) energy technologies China is in the lead also. This is of particular importance because whoever leads in this area could have a vast export market in the future, as China already has had in the area of PV (photovoltaic) solar panels.
In two areas that are likely to be very important if carbon emissions are to be reduced in the future – use of hydrogen as a fuel, and electric power generation by nuclear energy (in spite of widespread antipathy toward it as a result of misinformation) – the United States is lagging while China is leading. While renewable energy technologies such as wind and solar, supplemented as needed by nuclear energy or gas- or coal-fired power plants with carbon capture and storage (CCS), can provide electricity with zero carbon emissions, fuels for transportation will still emit large quantities of carbon dioxide unless they can be replaced with fuel created with electricity, such as hydrogen.
Gruber and Johnson show how China has taken the lead in the development of hydrogen fuel cell technologies as well as in innovations in nuclear energy such as high-temperature gas-cooled reactors (HTGRs). China has built the first hydrogen tram, and a new hydrogen fuel cell industry park will be built in Wuhan at a cost of US$1.7 billion. The United States has scaled back its HTGR program, but China has constructed a small, experimental HTGR at Tsinghua University in Beijing and a two-reactor demonstration plant in Shandong Province.
When Bill Gates’s nuclear energy start-up Terra Power was unable to build its traveling-wave reactor in the United States, it struck a deal with China to construct it there – until the recently souring U.S.-China relations nixed the deal, sabotaging an opportunity for cooperation in the development of a potentially all-important technology.
Why government funding of basic R&D makes sense
For private enterprises it doesn’t make financial sense to invest in research and development of technologies that will have strong spillover effects – that is, that will benefit other private enterprises at least as much as the one that develops them. The Internet, for example, was unlikely to be developed by any one private enterprise because its full financial benefits could not be captured by that enterprise. It had to be done as a public service.
Therefore, research and development of technologies that will produce benefits for many consumers, workers, and private enterprises can only be financed by government. This has been recognized for a long time, but with the rise of the somewhat mythical cult figure of the trailblazing entrepreneur, the scaffolding underpinning that entrepreneurship constructed by government has been largely ignored.
Gruber and Simon effectively counter fears that government investment in R&D will crowd out private investment. To the contrary, they show, government investment in R&D crowds in additional investment by private enterprises. Once public investments have developed a technology to the point where others can take advantage of it (consider the Internet, for example), private investors pile in to further develop it and its applications.
Gruber and Simon cite several studies that show that pathbreaking public investment entrains private investment. One amusing story, however, provides an example.
The robotics start-up iRobot was funded by the Defense Department to develop mine-hunting robots, but it then developed a consumer application called the Roomba, which sold millions. The co-founder of iRobot, Colin Angle, said, “It was a little weird working on mine-hunting robots and then my next meeting would be about vacuuming.” “The military business,” he said, “… enabled us to learn how to manufacture and sell and distribute these vacuuming robots.”
Anyone who has not seen a Roomba in action should seek out the opportunity to do so, or buy one. It is like having a blind marmot pottering around randomly on your floor, caroming smoothly off walls and furniture while vacuuming the floor at the same time.
How to even the distribution
Gruber and Johnson cite startling figures to show to what a great extent both economic growth and technological excellence have become concentrated in a few coastal superstar metropolises, using comparisons between average earnings per worker in U.S. metropolitan statistical areas (MSAs) for 1980 and the present.
They say:
In 1980, five of the top ten MSAs were in Michigan, and a sixth was Casper, Wyoming. These were MSAs whose income derived primarily from manufacturing and natural resource extraction. By 2016, the top ten included Boston, New York, San Francisco, San Jose, and Seattle, which were outside the top ten in 1980; Boston and New York weren’t even in the top twenty in 1980.
…None of those previously star Michigan areas make the top ten list today – indeed, they don’t even make the top twenty.
Furthermore, “In 1980, three of the top ten MSAs were on the East or West Coast; by 2016, nine of the top ten were on the coasts.”
This confirms the impression of only recent revelation that America’s prosperity has become centered in a few coastal enclaves, with the rest of the country – especially some of the areas that were previously prosperous – lagging far behind.
Not only are the coastal superstar metropolises now the most prosperous, they are the top recipients of grants from today’s less-lavishly-funded government R&D programs.
Prosperity was formerly more evenly distributed across the United States. The authors think they know part of the reason. Centers of research and development often grew around land-grant colleges or military bases. Government projects like the Tennessee Valley Authority also invigorated areas that otherwise would have been far from economic hot zones.
The authors offer as an example the industrial cluster that sprung up around the University of Central Florida and the Central Florida Research Park, which is the world’s center of the $5 billion modeling, simulation, and training (MS&T) industry. That cluster developed as a result of President Lyndon Johnson’s decision to establish, in the late 1960s, a new naval base, the Naval Training Device Center, with the mission of developing combat simulation devices.
Gruber and Johnson think that more evenly distributed growth can be kindled again if the government were to invest more in R&D and focus it on areas widely distributed around the country – the only requirements being that those areas have an excellent university (but it doesn’t have to be as exalted as Harvard, Stanford, or MIT), a relatively well-educated populace, and affordable housing. (The authors point out that part of the reason why people don’t move to the superstar cities to find work is that housing in those cities is too expensive, often because of zoning restrictions.) They have carefully compiled a list of such areas; there are many of them spread out across the U.S.
Rewarding the ultimate investor
To reward the investor in government-supported R&D – the U.S. taxpayer – Gruber and Johnson propose that government reap profits from its investments. It could do that, for example, by owning commercial property where a center for R&D is to be funded and renting it out to the industries established there, perhaps basing the amount of the rent on the profits of the tenants.
The government could then distribute the revenues it accumulates by paying an annual dividend equally to all Americans, much as the Alaska Permanent Fund distributes the revenues from oil and gas equally to all Alaska residents.
How could this become politically feasible
I believe this is at least as plausible as any other proposal for bringing America back to greatness and distributing the awards more evenly.
The authors do not discuss the politics of making such a proposal a reality. In the 1940s, 50s, and 60s it was the external threat that made it politically possible – first World War II, then the Cold War.
Could such a threat energize their proposal again? So far, I don’t see that happening. Perhaps it could happen if some truly catastrophic event alerted the American people to the climate threat – but such an event is likely to be too far down the road.
The event that spurred the strongest growth in government R&D spending was the Soviet Union’s launch of the globe-circling satellite Sputnik on October 4, 1957. It could be seen with the naked eye moving across the night sky – the first such human-made object – visibly supporting a frightening belief that the USSR had surpassed the U.S. in technological ability.
Perhaps a similar event will startle the U.S. to the fact – real this time, not superficial as was the case with the USSR – that the U.S. is being surpassed in technological capability by a strongly competing power, China.
And maybe this will make Gruber’s and Johnson’s recommendations a reality.
Economist and mathematician Michael Edesess is adjunct associate professor and visiting faculty at the Hong Kong University of Science and Technology, chief investment strategist of Compendium Finance, adviser to mobile financial planning software company Plynty, and a research associate of the Edhec-Risk Institute. In 2007, he authored a book about the investment services industry titled The Big Investment Lie, published by Berrett-Koehler. His new book, The Three Simple Rules of Investing, co-authored with Kwok L. Tsui, Carol Fabbri and George Peacock, was published by Berrett-Koehler in June 2014.
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