The Next Economy

To create jobs at home, the United States must forgo protectionism and embrace innovation.

Over the last 15 years, about 3 billion people, or half the world’s population, joined the global marketplace, from China and India to Russia and Eastern Europe. These consumers are ready, willing, and increasingly able to purchase high-tech products "made in the U.S.A." More than 70 percent of U.S. semiconductor sales come from outside the United States. The Asia-Pacific region alone accounted for 40 percent of Intel’s revenue in 2003. These new players in the global marketplace may represent growth opportunities for U.S. companies, but they are also would-be entrepreneurs who pose a threat to the United States’ economic and technological leadership. In addition, U.S. corporations must compete against overseas governments determined to make their countries the best place to do business. The economies of foreign competitors are growing fast. India’s gross domestic product (GDP) is expanding at an annual rate of 8.1 percent, China’s at 9.1 percent. These governments are developing infrastructures, offering tax and development incentives to attract investment, and, in many cases, deploying a more educated and motivated workforce than that of the United States. Just 1.6 percent of 24-year-olds in the United States have a bachelor’s degree in engineering, compared to figures roughly two times higher in Russia and four times higher in South Korea and Japan. Chinese universities confer more than three times as many engineering degrees as U.S. universities.

The bottom line is that the United States no longer has a lock on the ideas and innovations of the future or the white-collar jobs that flow from them. Knee-jerk protectionism will not reverse this trend or keep jobs at home. Instead, the United States must rethink the government’s role in research and development (R&D), establish a 21st-century communications infrastructure, and, last, pledge to "do no harm."

To make U.S. companies and the workers they employ more competitive, the federal government must prioritize investment in the industries of the future. The share of total U.S. R&D devoted to basic research (conducted without any specific application in mind) has fallen 37 percent as a percentage of GDP over the last 30 years. In 2000, the U.S. government sponsored 26 percent of all R&D, compared to 47 percent in 1981. This downward spiral is especially acute in the physical sciences, where funding has remained flat for several years.

Federal investment in basic R&D is critical because it benefits the entire scientific and engineering community. Some of the most significant innovations of the last 20 years, including the Internet and fiber optics, are products of basic R&D. Each year, the Massachusetts Institute of Technology (MIT) spawns around 150 spin-off companies. The more than 4,000 companies founded by MIT alumni and faculty today employ 1.1 million people, with annual sales totaling $232 billion. Without a significant federal commitment, the U.S. innovation pipeline will dry up. In order to remain competitive, the U.S. government should increase the budgets of public research agencies such as the National Science Foundation by 10 to 12 percent a year over the next five to seven years, make permanent the R&D tax credit, and fully fund additional initiatives like the Focus Center Research Program, a multi-university network designed to expand cooperative and long-range microelectronics research.

But investment is of little use without an infrastructure to support it. The U.S. government should also establish a national broadband-technology policy that enables deployment of a next-generation telecommunications network. An infrastructure that provides reasonably priced wired and wireless access to broadband will provide a backbone for future technological developments. Broadband is increasingly the medium through which the world conducts commerce and a crucial conduit for information and services, including education and healthcare.

In this area, the United States is already behind. According to the International Telecommunication Union, the United States ranks 11th out of 15 highly developed countries in wired broadband household penetration. The Federal Communications Commission is taking steps to free up parts of the currently underutilized radio spectrum for information-technology use. More ought to be done. The U.S. government should employ a minimalist approach to telecom-pricing regulation by doing away with the patchwork of local "rights-of-way" policies that inhibit the national expansion of broadband services and by creating targeted, supply-side incentives for investment.

Protectionist policies, such as legislation that penalizes U.S. companies for relocating jobs overseas, might postpone pain in the short term, but they will do irreparable harm to the U.S. economy in the years ahead. Another example of bad medicine is the U.S. Financial Accounting Standards Board’s recent proposal to expense corporate stock options, which requires a charge to earnings when options are distributed. Stock options are an important employee recruitment and retention tool for many leading-edge companies in the U.S. technology industry. Regulating stock options will only discourage the use of a proven method of attracting talent and raising capital for eager, aggressive start-up companies. Other countries have already realized the benefits of such stock incentives. In 2002, China encouraged the use of such stock options in its 10th five-year plan for economic growth.

U.S. leaders need to look past the November election. Beyond the borders of their congressional districts and the "blue" and "red" states of the electoral map is a constantly changing world to which the nation must adapt. The government should help displaced workers, but it must also think years down the road and make some necessary — albeit difficult — decisions now. In the technology industry, we believe that you cannot save your way out of a recession; you can only invest your way to prosperity. The same holds true for the entire United States.

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