Innovation economics and the future of American competitiveness

Will our future be more like Boston's or like Buffalo's?

The right investments now can avoid our becoming "rust nation." Image credit: iStock by Getty

 During the 1970s and 1980s, the once-mighty industrial hubs of the Northeast and Midwest saw a vast outpouring of jobs as they lost their competitive advantage to the South and to the West. The result was the birth of the “rust belt,” vast swathes of which never recovered.

Today, we face a similar challenge, although now it’s about our nation as a whole. As other global economies become increasingly competitive, especially in Southeast Asia, we risk becoming “rust nation.”

“As other global economies become increasingly competitive, especially in Southeast Asia, we risk becoming ‘rust nation.'”
Since the late 1990s, the United States has been losing out to other nations with respect to competitiveness and innovation. America lost almost one-third of its manufacturing jobs, while it ranked forty-third out of forty-four nations in the rate of progress in innovation-based competitiveness. The result was a much-reduced demand for capital for wealth-creating investments like factories, research, and new equipment. In response, Wall Street, desperate to keep their money machine going, funneled that surplus capital into a Ponzi scheme called the housing bubble.

We all know what happened next.

But even while pundits tell us that we can eventually expect things to get back to “normal”  — housing prices will go back up, unemployment down, and confidence will return — neither the recession nor the anemic recovery can be attributed simply to a financial crisis caused by the bursting of the housing bubble. Rather, as I argue in Innovation Economics: The Race for Global Advantage, a major contributing factor has been the United States falling behind in the race for global innovation advantage.

Today, nations compete fiercely to grow and attract the highest-value-added economic activity, the high-wage, knowledge-intensive manufacturing, research, software, information technology (IT), and services jobs that power today’s global, innovation-based economy. These are the very industries that for so long powered American prosperity and jobs.

Nations around the world are establishing national innovation strategies, restructuring their tax and regulatory systems to become more competitive, expanding support for science, technology, and infrastructure, improving their education systems, and taking a myriad of other pro-innovation steps. Moreover, they are coupling these “good” policies with “bad” innovation mercantilist policies such as intellectual property theft, forced technology transfer, and currency manipulation.

But while other nations are setting their sights on winning the race for global innovation advantage, America remains asleep, convinced of its own innate economic superiority and preoccupied by the challenge of the “War on Terror” and conflicts between “Red” and “Blue” states over a range of hot-button social issues. And setting the rules for what is an acceptable economic playbook for Washington, “neoclassical” economists counsel policymakers to not worry because nations don’t compete, only firms do; innovation is “manna from heaven” that occurs naturally; and government action to spur growth only makes things worse.

“Nations around the world are establishing national innovation strategies, restructuring their tax and regulatory systems to become more competitive, expanding support for science, technology, and infrastructure, improving their education systems, and taking a myriad of other pro-innovation steps. “
When Northeast and Midwest states realized their factories could relocate anywhere in the country, not all of those rust belt regions declined. Some, like Buffalo, New York did, but others, like Boston, transformed themselves by putting in place economic development strategies to grow and retain those “smokestacks.” Boston’s success in electronics (much of it a spin-off from MIT and defense labs) grew into a thriving industry, now supplemented by a world-class biotech hub. And its long-standing strength in financial services provided a base for expansion.

Today, if we are to avoid becoming “rust nation,” Washington needs to do the same and put in place a robust innovation-based competitiveness strategy.

Becoming “Boston” means moving aggressively into next-generation industries, including advanced IT, biotechnology, nanotechnology, robotics, and high-level business services, while at the same time maintaining a share of highly efficient and competitive traditional industries (such as autos, machine tools, and chemicals), and continually raising productivity in “non-traded” sectors such as retail and health care.

Becoming Boston means putting in place an aggressive national innovation-based economic strategy, which includes significantly increased government investment in the building blocks of growth (science and technology, skills, and infrastructure) and significantly lower taxes on corporations, especially those competing in global markets.

“[I]f we are to avoid becoming ‘rust nation,’ Washington needs to … put in place a robust innovation-based competitiveness strategy. “
And becoming Boston means waking up to the reality of global economic competition, becoming full-throated advocates for innovation, and embracing “innovation economics” which puts advancing innovation-based competitiveness at the forefront of economic policy.

So perhaps the single most important question confronting the United States is whether over the course of the next quarter century, we will become Boston and rise from decline through innovation and economic transformation, or become like Buffalo and sink further into economic obscurity.

The choice is ours to make: Buffalo or Boston.  For the sake of my children, I hope we choose Boston.

Robert Atkinson is President of the Information Technology and Innovation Foundation. His book, Innovation Economics: The Race for Global Advantage, was released in paperback in March of 2014. Follow: robatkinsonitif.