In his State of the Union Address President Obama warned of a “Sputnik moment” in terms of the need for a wake-up call for the nation to confront our international competitiveness and innovation challenge. The President stated, “We know what it takes to compete for the jobs and industries of our time. We need to out-innovate, out-educate, and out-build the rest of the world.” He then proceeded to lay out an agenda featuring five pillars: innovation, education, infrastructure, deficit reduction, and reforming government. A week later the administration released its updated “Strategy for American Innovation” which focuses on three broad areas: 1) Investing in the building blocks of American innovation; 2) Promoting competitive markets that spur productive entrepreneurship; and 3) Catalyzing breakthroughs for national priorities and calls for renewed commitment to spurring U.S. innovation.
There is much to like about the Administration’s agenda. Never before has a President made such an articulate and forceful statement in support of U.S. innovation and innovation policy. President Obama highlighted not only the centrality of innovation and competitiveness to the future of the U.S. economy, but also the critical role of government in both. To be sure, we need such an agenda. As ITIF found in its report The Atlantic Century the United States ranks 40 out of 40 nations in the rate of progress over the last decade on a host of innovation-based factors such as growth in R&D, venture capital, and scientists and engineers.
In evaluating the President’s plans it is useful to think about “the Four T’s” – Tech, Talent, Taxes and Trade.
The Administration’s agenda is rightly grounded in restoring innovation fundamentals on the Tech and Talent front. Obama’s call to significantly increase federal support for scientific and technological research is critically needed. The United States used to be the global innovation leader because the federal government provided generous supported for research, which in turn spurred private sector research and a strong technology sector. But growth in federal support over the last quarter century has been so anemic that that if we wanted to restore federal support for research its 1987 levels (as a share of GDP), we’d have to invest an additional $60 billion annually! The President also rightly laid out an agenda for scientific and engineering talent, including a call to reform immigration laws to better enable high skill students and workers to come and stay in the United States. In addition, his call for better infrastructure, and in particular for freeing up underutilized spectrum now being underutilized by TV broadcasters for more valuable wireless broadband services is sorely needed.
The President also wisely highlighted the importance of manufacturing. But here the problems are so grave that a much more ambitious and bold approach is needed. The U.S. industrial base is much weaker than most in Washington admit, as many sectors have dramatically shrunk over the last decade, taking not only jobs but also knowhow.
The Administration’s commitment to spur job growth in clean energy manufacturing makes sense, but is not enough. While clean energy manufacturing can play a key role in reviving the manufacturing health of a small nation like Denmark (which is a leader in wind turbine production), it can play only a small role in an economy the size of the United States. We need to be competitive not just in clean energy, but in a wide range of manufacturing industries, including vehicles, aviation, medical (biotech, pharmaceuticals, and medical devices); IT, primary metals, machine tools, and equipment.
Expanding support for science and engineering research and talent will help reinvigorate these sectors. However, the fact remains that we must do what many nations have done: put in place an explicit manufacturing policy, which includes support for manufacturing technology. This means significantly expanding programs like the NIST’s Manufacturing Extension Partnership program and providing NIST with significant new funding to support the creation of a network of sector-based manufacturing technology innovation centers modeled after German’s network of Fraunhofer centers.
Winning in the new global innovation economy requires more than expanded support for technology and talent; it also requires support for the other two “T’s”: Tax and Trade.
With regard to taxes, the President proposed two steps. First, he advocated raising the research and development tax credit from 14 percent to 17 percent. This is long overdue, for the U.S. R&D credit has become stingy compared to our competitors. While in the 1990s firms in the U.S. benefited from the most generous R&D tax credit in the world, today the U.S. credit is just 17th most generous of 30 OECD nations. The President’s proposal would move us up, but only to 13th place. If we are really serious about winning the race for global innovation advantage, the Administration should call for a credit of at least 20 percent, and ideally to 30 (the latter would move us into the top 5 nations).
Second, the President proposed getting “rid of the loopholes” and using the savings to lower the corporate tax rate. For the neoclassical economics priesthood that dominates Washington economic thinking, this was preaching to the converted. For them the ideal tax code is one with minimal deductions and credits that treat all industries alike. But this “broaden the base, lower the rate” approach would in fact make the U.S. less competitive, not more. Tax simplification would reduce taxes on industries that face virtually no international competition (e.g., electric utilities) while raising them on industries that in competition every day for global market share (e.g., many technology-based industries). The end result would be further movement of U.S. jobs offshore. On top of this the President promised that corporate tax reform would be revenue neutral. This means that companies in the U.S. would still pay among the highest taxes in the world. Rather than simplification, we should be making the corporate tax code an engine for restored industrial competitiveness while reducing the effective rate. Besides boosting the R&D credit, the administration should advocate for generous tax credit on investments in new capital equipment and software.
This gets us to the fourth “T”, trade. Unless the United States develops a coherent agenda to combat foreign innovation mercantilism, there is simply no way to make good on the President’s proposal to double exports in five years. Competition in the global market brings out the best in the creativity and work ethic of this country and we should always seek to expand the flow of trade. But when other countries break the rules, subsidize with abandon, develop an array of bogus reasons to keep our products out of their markets, steal intellectual property, and manipulate currency values, no amount of Yankee ingenuity and hard work will matter.
In particular, it is clear that the health of the U.S. manufacturing sector is inversely related to the health of the Chinese manufacturing sector, at least as long as Chinese economic policy is premised on cheating – e.g., trade mercantilism. As such any comprehensive national innovation strategy has to lay out a plan for combating foreign innovation mercantilism.
The administration can start by labeling Chinese currency policy what it is: currency manipulation. It can then go on to much more aggressively fight foreign mercantilism, including significantly stepping up pressure on mercantilist nations and bringing significantly more cases before the WTO. If we fought foreign innovation mercantilism with one-quarter of the effort we put into fighting foreign terrorism, the U.S. economy would be in dramatically better shape.
In addition to the four T’s, we need to transform the mindset of government itself so that innovation drives decision making. Any effective innovation agenda has to conceive of innovation policy not just as the province of agencies like NIH, NSF or DARPA, but of all federal agencies. Indeed, every federal agency through their regulatory and procurement functions plays a role for good or ill in affecting innovation. When the Patent Office takes up to 5 years to issue a patent, it hurts innovation. When the FDA adopts an overly strict and bureaucratic approach to bringing new drugs and medical devices on the market, it hurts innovation. When the Department of Agriculture limits the use agricultural biotechnology it hurts innovation. And when the Federal Trade Commission proposes stifling rules regarding Internet privacy it hurts innovation.
To his credit, the President has initiated a needed regulatory reform agenda to identify regulations that have outlived their usefulness. But the next step is to do more than review old regulations, it’s to charge existing agencies of government to make the promotion of innovation and competitiveness a key part of their mission (which it is not now) and that won’t happen without rigorous White House oversight. That’s why we proposed that the administration create an Office of Innovation Review within OMB whose job is precisely that to ensure that agencies consider the impact of the actions on innovation.
All of these recommendations are made in the context of a dire budget situation. The President struck the right tone when he stated, “Cutting the deficit by gutting our investments in innovation and education is like lightening an overloaded airplane by removing its engine. It may make you feel like you're flying high at first, but it won't take long before you feel the impact.” But there is a very real risk that deficit cutting fever will mean that most see this as a mere footnote in the President’s speech and that productive investment as well as wasteful spending will be cut. Therefore, the President must be prepared to kick start a frank discussion about the country’s debt and deficits that most Americans know we need.
There is really only one way to avoid this impending investment destruction: to admit the politically unpopular truth that the only way to solve the budget deficit is by tackling entitlement spending growth. We will need to consider modest reductions in benefits for workers with decades to go before retiring, raising the retirement age so people take less in Social Security and Medicare, raising taxes, particularly on the wealthy and other steps. But neither party wants to make these tough choices, largely because most Americans want to continue the delusion that they can have their cake and eat it too. But until this happens, making the space for the kinds of key public investments and tax incentives to really restore U.S. innovation and competitiveness leadership will be difficult.
Making sure that the United States finally wakes up and puts in place a real national innovation and competitiveness agenda is tough work, given how deeply held the view is that that the United States is the natural leader in innovation and has to do nothing more than let the market work its wonders. The President deserves credit for telling us we aren’t as invincible as we think we are while also reminding us that we are more than up to the challenge of getting back in the lead. His innovation agenda is the best we have seen from a president in a long time but it can and should be even bolder. The President probably knows this, but he also recognizes that he needs to first navigate twin political and economic challenges that no president has seen in a long time.