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  • Thursday, March 03, 2005


    Setting Sun of the US Economy

    The following is taken from Dearth of a Nation, a cheery little article that examines the tipping point and slide of American innovation downhill. I don't like most of the industrial and consumer economy in the US but I have to concede that it is what makes much of our standard of living possible. I think this point is a opportunity to reexamine our priorities as an industrial nation. Or just exist in decline until China forcloses on the one third of our nation debt that they hold. Happy, happy, joy, joy.

    During the same conference, two floors up in the very same building, a group called the Council on Competitiveness held another event for the press, in which it laid out a very different vision. This group, comprised of 400 blue-chip business executives (the CEOs of IBM, Pepsi, and General Motors, among others) and university presidents – as rough an approximation of the American establishment as you could fit in a single room – was nearly as downbeat as the president was buoyant. The astonishingly fast rise of international competitors, they warned, has meant that the American economy has reached an "inflection point," a "unique and delicate historic juncture" at which America, "for the first time in our history ... is confronting the prospect of a reverse brain drain."

    The report made a point of noting that the United States remains the world's dominant economy, the leader in fields ranging from biotechnology to computers to entertainment, but the CEOs nevertheless cited worrying evidence that this dominance might not last. For decades, the United States ranked first in the world in the percentage of its GDP devoted to scientific research; now, we've dropped behind Japan, Korea, Israel, Sweden, and Finland. The number of scientific papers published by Americans peaked in 1992 and has fallen 10 percent; a decade ago, the United States led the world in scientific publications, but now it trails Europe. For two centuries, a higher proportion of Americans had gone to university than have citizens of any other country; now several nations in Asia and Europe have caught up. "Those competitor countries ... are not only wide awake," said Shirley Ann Jackson, the president of the American Association for the Advancement of Sciences, "but they are running a marathon ... and we tend to run sprints."

    While the president's talk focused almost exclusively on the need to free up capital for investment, these CEOs barely mentioned that as a problem. Instead, they stressed various below-the-radar government actions that they felt were undermining America's competitive edge: security arrangements that have crimped the supply of educated immigrants; recent cuts in science funding (the president's 2005 budget sliced money for research in 21 of 24 areas); and the reassigning of what research funding remains to applied research, most of it in homeland security and the military, and away from the basic scientific research that economists say is the essential engine of future economic growth. They also expressed concern about those policies Washington was not pursuing but should be: broadening access to patents; increasing research into alternative fuels; and bringing information technology into the health care market.

    When the newspapers reported the event the next day, the president's speech got front-page treatment. The CEO's presentation received only a short item on page E3 of The Washington Post, and no mention at all in The New York Times. This gap in media coverage reflected not only the power of a newly elected president to dominate the news, but also what might be called a macroeconomic bias. When the press and most Americans think of economic policy, they think of macroeconomic matters – tax rates, budget deficits, trade balances – whose fluctuations have instant, tangible effects on interest rates, stock prices, and exchange rates – things newspaper readers and casual investors can see, track, and relate to.

    But there is another set of ways in which Washington has always affected the long-term health of the economy: by making investments, regulatory changes, and infrastructure improvement to spur the economy forward, creating new industries and giving new tools to old ones. This category of policies has not traditionally been given a single name but might best be called "microeconomic policy." Historically, this has been the heroic side of economic policy: The Louisiana Purchase may have been a shrewd maneuver for continental expansion, but it was also a jobs program for landless citizens eager to carve their own farms in the wilderness – which is how Jefferson sold the treaty to Congress. The land grant college system, signed into law by Abraham Lincoln, provided the nation's farmers with expert guidance on the latest agricultural techniques to improve their crop yields. No entrepreneur could figure out how to mass produce cars profitably, writes Harold Evans in his excellent new book They Made America, until Henry Ford fought an aggressive bid against restrictive patents. The pharmaceutical, financial, and airline industries blossomed thanks to the creation of the FDA, SEC, and FAA, which gave customers some assurance of safety when they popped pills, traded stocks, or boarded flights. The G.I. Bill provided a generation of veterans with the college educations they needed to build the post-war middle class. The creation of the federally-guaranteed 30-year mortgage proved the decisive tool in the growth of the post-war American suburb.

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