Review (Guest): Innovation Economics

4 Star, Capitalism (Good & Bad)
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Robert D. Atkinson and Stephen J. Ezell

4.0 out of 5 stars Pragmatism, Not Ideology, Key to Remaining in Pole Position in the Innovation Race, November 4, 2012

Serge J. Van Steenkiste

Robert Atkinson and Stephen Ezell systematically challenge the ideological tenets of the dysfunctional Washington Economic Consensus that the U.S. economic elites cherish (pp. 54-56; 73-74; 78-80; 82-84; 93; 231-232; 250; 360; 363-364). Messrs. Atkinson and Ezell convincingly demonstrate that the U.S. is losing the innovation race by making the same mistakes that the United Kingdom made during its dramatic industrial decline from the mid-1950s to the late 1970s. The outcome of this decline has been trifold: 1) a decline in real manufacturing output as a share of gross domestic product, 2) the emergence of chronic trade deficits, and 3) slower per capita economic growth than most comparable nations over a sustained period of time (pp. 9; 32-56; 57-84; 360).

If the U.S. does not want to follow in the footsteps of the United Kingdom, it needs to acknowledge the gravity of the situation and acts decisively and boldly before it is too late (pp. 31-32; 62; 85-127; 162-163; 234; 250; 252; 263). Therefore, Messrs. Atkinson and Ezell call for a new Washington Economic Consensus based on the following ten principles:

1. Although the U.S. still has important strengths in sectors such as advanced aerospace and medical devices, it is no longer leading in innovation-based competitiveness. Think for example about the fast declining manufacturing sector, the more rapid growth of R&D overseas, or the relative decline in the number of scientists and engineers. This decline is expected to continue unless business, labor, academia, and the government work together (pp. 9; 17; 25; 34-46; 49-54; 59; 82; 89; 95; 97; 103; 109-124; 181-187; 227; 233; 236-237; 312).

2. The major economic role for the government is to organize societal resources (research, finances, knowledge, skills, and entrepreneurial effort) to generate new products, processes, and business models. The key to success for innovation is to combine flexibility for organizations to restructure and to innovate with security for workers. The security of workers should be tied to employability, not to employment (pp. 233; 300; 315-316).

3. Fiscal discipline is important, but funding for policies to spur innovation and competitiveness should not be subordinated to the short-term individualistic orientation of both the Left and the Right. The U.S. business community and society do not seem to be able to summon the will to invest for the long term and to grow wealth anew (pp. 13; 27; 66-68; 71-72; 75-76; 80-81; 233; 242-245; 312; 319; 359-360).

4. Globalization can be beneficial to the U.S. under two conditions. First, the country needs to systematically bring cases whenever U.S. interests are being hurt, even if U.S. companies do not want them to proceed. This policy would make clear to mercantilist nations, especially China, that threatening to punish U.S. firms for bringing cases is futile. Secondly, the U.S. has to correctly structure the three sides of the innovation success triangle, i.e., an effective business environment, an effective regulatory environment, and a strong innovation policy system. The U.S. innovation policy environment falls short in the areas of tax, trade, technology, and talent (pp. 10-11; 13; 31; 134-135; 141; 209; 215-216; 218; 233; 245; 251; 254; 259-263; 316-318; 320).

5. More and more nations have adopted a zero-sum, beggar-thy-neighbor innovation mercantilism to attract or to grow high-wage industries and jobs at the expense of the U.S., and in violation of the spirit and / or letter of the law of the global trading system. However, the export-led growth model pioneered by Japan and abundantly copied thereafter is hitting a wall due to the increasing inability of the U.S. and Europe to import at high enough levels (pp. 6; 11; 77-78; 90; 159; 191-225; 233; 259-263; 327; 331-332; 334; 356-357).

6. America’s role in the global economy is to be a tough competitor that looks after its own economic interests first. The U.S. foreign policy has been focused mainly on military, not economic issues since the end of WWII. Furthermore, the U.S. needs to take the lead in working with other liked-minded nations committed to enforcing the global rules of fairly growing an innovation economy (pp. 46-49; 76-77; 100; 104-108; 159; 192-209; 210-211; 218; 224-225; 230; 233; 319; 346-348; 350; 352; 356; 359; 365-366).

7. Firms in traded sectors, high-growth entrepreneurial companies, and U.S.-headquartered multinational corporations are the jobs, innovation, productivity, and export engines of the U.S., which need to be encouraged by policy. Contrary to popular belief, Wall Street and Main Street play a secondary role in these areas (pp. 14-15; 27; 130-133; 142-159; 233; 274-275).

8. The best tax code is one that offers more incentives to invest in the U.S. Therefore, the U.S. Congress should take measures such as making the R&D credit permanent and more generous, recognizing the importance of high-skill immigration, and giving the Office of the United States Trade Representative more resources for trade enforcement. At a combined state-federal rate of 32 percent, the U.S. effective corporate tax rate is one of the highest in the developed world (pp. 171-176; 234; 238-239; 241; 298).

9. The federal government needs to not only support what the authors call “factor conditions” (e.g., basic scientific research and education), but also key broad industries and technologies (pp. 99; 134-141; 234-235; 245-249).

10. The government should pick winners by identifying general industries and broad technology areas of national economic importance and play a decisive role in mobilizing public and private resources to meet clear opportunities and challenges. Firm size should not be a criterion to pick winners. More and more U.S. companies realize that they are competing against foreign companies that are backed by their states (pp. 14-15; 69; 91-101; 124-127; 133-141; 158; 176-181; 192-209; 234; 275; 279; 291).

In summary, Messrs. Atkinson and Ezell invite Americans to recognize that the U.S. is no longer in pole position in the innovation race and to act decisively and boldly before the ongoing decline becomes irreversible.