[Paleopsych] Washington Monthly: Benjamin Wallace-Wells: Dearth of a Nation

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Benjamin Wallace-Wells: Dearth of a Nation
March 3, 2005

There is a moment in the lifespan of every cool new gadget ÿÿ two years 
after Bill Gates buys one, a year and a half after the popular press gets 
wind of it ÿÿ that its price drops enough to show up in significant 
numbers on the shelves at Best Buy, the electronic superstore. At this 
instant, the product becomes accessible for middle-class Americans, 
something they can imagine themselves buying, and so these electronics 
stores have become temples to innovation, the place most Americans go to 
get as close to the cutting edge as most of them dare. On weekend 
afternoons, Best Buy is as bustling as a souk, full of grandmothers and 
little kids tooling around with digital video cameras and geeked-out 
salesmen explaining to the moms that the cell phones in their hands have 
nearly the computing power of desktop PCs. But it's the men who are the 
most transported, moving from department to department with gawky 
reverence. At a Best Buy I visited recently in Alexandria, Va., I watched 
one dad gaze in wonder at row upon row of giant plasma televisions ÿÿ 
elegant silver-framed screens that seemed not just to capture the way the 
world looks, but to improve upon it. He watched bees extract honey from 
flowers, and spiraling footballs drop into the hands of receivers, and you 
could almost see a two-part thought process play out over his face: First, 
If I wait a year, these sets will be half the price. Second, Screw it, I'm 
buying one now!

But there was something else I noticed: Whereas a decade ago the most 
creative, groundbreaking stuff came from Silicon Valley, now it all seemed 
to come from overseas. The plasma televisions were from Korea; the 
computer-like cell phones were from Finland; the feature-packed digital 
cameras were from Japan.

During the last six months, we have begun, quietly, to enter a newly tense 
moment, with university presidents, business leaders, and columnists 
delivering ominous-sounding reports and editorials about the threat to 
American innovation posed by a freshly competitive world ÿÿ the renewed 
vitality of western Europe, Japan and Korea, and the ravenous growth of 
China and India. "We no longer have a lock on technology," David 
Baltimore, a Nobel laureate and the current president of the California 
Institute of Technology, wrote recently in the Los Angeles Times. "Europe 
is increasingly competitive, and Asia has the potential to blow us out of 
the water."

What worriers like Baltimore are beginning to grasp is that these changes 
are emerging just as the American economy is being made more vulnerable by 
the movement of manufacturing and service jobs overseas. As a result, 
we've become increasingly dependent on maintaining our edge in discovering 
the new technologies and applications that create whole new industries ÿÿ 
just as other countries are closing that gap.

This is a fundamentally new threat. In the '70s and '80s, Japanese and 
European firms adopted American technology and made key improvements in 
process and design to shave cost and increase quality. Now, foreign 
companies are making many of the most important breakthroughs themselves. 
This shift is part of a change in strategy: instead of copying our 
innovations, foreign governments have decided to copy our very model of 
innovating. They have studied our centers of invention, the Silicon 
Valleys and Research Triangles, where university scientists, venture 
capitalists, high-tech entrepreneurs, and educated, creative workers, many 
of them from overseas, congregate. These creative centers, our competitors 
have learned, were the result of federal policy ÿÿ decades of investment 
in basic scientific research; patent law changes that allowed universities 
to capitalize on discoveries made in their labs; financial reforms that 
gave rise to the venture capital industry; and immigration laws that 
opened the door to talented foreigners.

Over the last decade, our competitors have implemented similar policies at 
home: They have built universities, reformed financial markets, invited in 
immigrants, and made the development and adoption of new technologies 
national goals. Now, they're reaping the benefits. The technologies behind 
plasma screens emerged have been refined and expanded in labs under a 
research partnership between the Korean government and the electronics 
maker Samsung. Europe established its lead in mobile phones when European 
countries set a single standard for mobile communications (American firms 
are hobbled by lower-quality spectrum and three competing standards).

Foreign competitors are edging out the United States not just in today's 
snazzy consumer goods, but in the technologies that will define the 
marketplace in the years to come. Most economists and new economy thinkers 
believe that the likeliest candidate for the Next Big Thing is the 
research being done in nanotechnology, a catch-all term for the 
manipulation of matter at the molecular level. Nanotechnology could 
someday be used to repair broken DNA to prevent cancer, create 
supercomputers the size of pinheads, or fabricate building materials 150 
times the strength of steel. American scientists have been tinkering with 
nanotechnologies for 20 years. But some of the most cutting-edge research 
today is coming from overseas. Last August, Israeli scientists announced 
that they'd managed to develop manipulable nano-wires, tiny organic tools 
they could use to rearrange atoms and conduct electricity over microscopic 
spaces, a breakthrough a leading MIT nanotechnologist admitted American 
researchers had been chasing "for many years." In September, Japanese 
scientists announced that they would soon be able to use nano-engineering 
to build a computer chip 30 times more powerful than Intel's best. The 
breakthrough led American analysts to conclude that the United States was 
beginning to lose the race to bring nanotechnology products to market.

The worry of economists and business leaders is not simply that Japan, 
Israel, or South Korea will beat us, like one football team does to 
another. It is, more precisely, that we'll only be able to take advantage 
of rising wages in those countries (and afford our own here) if we 
continue to create new, cutting-edge products and services to sell to 
those countries ÿÿ and right now America does not seem to be doing as much 
of that as we were just a few years ago.

This new competition from other developed countries, and the failure of 
America to fully keep pace, is one cause of our anemic job creation, three 
years after what was, by historical standards, a brief and fairly light 
recession. Another reason, of course, is the rise of China and India, 
where U.S. firms have not only moved manufacturing plants but also 
"outsourced" service sector jobs. America's employment base is being 
squeezed by these two pincers ÿÿ China and India from below, and the 
developed world innovating from above. Over time, those pincers may come 
together, as China and India also become proficient in high-end 
innovation. China is already opening universities at a breathtaking clip, 
while Intel, Hewlett-Packard, Microsoft, and Verizon have all opened 
research labs there ÿÿ the kind that anchored the development of Silicon 
Valley. "It's become inevitable," says Ross Armbrecht, president of the 
Industrial Research Institute, which is the think tank for the research 
arms of America's corporations, "that more and more of the most 
far-reaching innovations will be going overseas, to India and China, in 
the near future."

Economics is a negotiation in uncertainties, and so nobody's really sure 
what all of these changes will mean for the well-being of the American 
middle class. But when you survey economists, policymakers, and business 
leaders about America's long-term future, it's hard to find many rank 
optimists; there are the Panicked, and then there are the Merely Tense. 
Richard Lester, the head of MIT's Center for Innovation, told me he 
belongs in the latter camp: "Things look somewhat bleak in the long-term, 
but if you look around Boston, at the incredible concentration of talent 
and opportunity here, we've still got a head start, and if we're smart we 
can probably build on it." Among the Panicked are economists such as MIT 
Nobelist Paul Samuelson, who has recently argued that the rapid spread of 
innovative capacity to other countries with lower labor costs makes him 
doubt the whole doctrine of "comparative advantage," on which much of 
modern economics rests.

If there's a way to escape this grim future, economists agree, it is for 
America to reverse its slowly slumping innovation machine. Perhaps the 
hottest area of economic research right now centers around technology, 
trying to figure out what exactly the United States did in the '90s and 
how we can do it again. In university economics departments and corporate 
executive suites across the country, the sense that we're in a pivotal 
fight for continued economic preeminence is already common knowledge.

But in Washington, these new economic realities have barely been noticed.

The Heroism of the 30-Year Mortgage

On an overcast day in mid-December, President Bush assembled a group of 
CEOs at the Reagan Building ÿÿ a behemoth of a federal office complex that 
has become the favorite venue for small-government conservatives ÿÿ for a 
conference to promote his economic agenda. The tone of the conference, so 
soon after a winning election, was upbeat, cheery, back-slapping, the 
happy Chamber of Commerce banter of executives who have recognized a 
problem that they know how to fix. At the end of the day, the president 
himself took the stage. He said the economy was fundamentally strong and 
that government's role would be to "create an environment that encourages 
capital flows and job creation through wise fiscal policy." To do this, he 
said, he would ask for Congress to privatize Social Security and make his 
tax cuts permanent. He compared himself favorably to Franklin Roosevelt. 
He left the stage.

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 ÿÿ as rough an 
approximation of the American establishment as you could fit in a single 
room ÿÿ 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 

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 ÿÿ tax rates, budget 
deficits, trade balances ÿÿ whose fluctuations have instant, tangible 
effects on interest rates, stock prices, and exchange rates ÿÿ 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 ÿÿ 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.

These investments and regulatory changes aren't merely tools of the past; 
it is impossible to imagine the '90s boom emerging without them. Early 
investment from the Pentagon helped nurture the internet. The algorithm 
that powered Google was developed when co-founder Larry Page, then a 
Stanford graduate student, won a federal grant to write a more efficient 
sorting and search engine for libraries. The innovative new medicines that 
have driven the expansion of the biotech and pharmaceutical industries 
arose from university research largely financed by the National Institutes 
of Health. The commercialization of these and other discoveries was 
financed by a venture capital industry that developed only after 
legislation, sponsored by Republican lawmakers and signed by President 
Jimmy Carter, enabled an advisory firm to hold significant stock in a 

For most of the country's history, both political parties have favored 
various microeconomic initiatives ÿÿ though Democrats have been more 
comfortable with using government to intervene in the marketplace, while 
Republicans have tended towards a laissez-faire approach that stressed 
lowering the cost of capital. These tensions sparked big debates in the 
1980s about "industrial policy," with (mostly) Democrats arguing for 
various kinds of sector-specific technology investments and relief from 
Japanese competition and (mostly) Republicans arguing that the federal 
government should cut taxes, trust the market, and not "pick winners and 
losers." Still, each party has traditionally played on both the macro and 
microeconomic policy fields. Kennedy cut marginal tax rates when they were 
excessively high in the early 1960s. Clinton cut the deficit to reduce 
interest rates. Eisenhower built the interstate highway system. Reagan 
gave crucial tariff protection to America's then-ailing semiconductor 

Under President Bush, however, the GOP's natural economic policy 
tendencies have been hyper-charged by a grand political vision. Karl Rove, 
Grover Norquist, and other Republican strategists have argued that massive 
annual tax cuts and the privatization of Social Security will not only 
increase the flow of capital into the marketplace, but will also put 
Democrats at a long-term electoral disadvantage and usher in a new era of 
GOP dominance. That these policies also require the government to take on 
trillions of dollars in extra debt, just as the first baby boomers are 
reaching retirement and trade imbalances are reaching historic levels, is 
seen by GOP leaders as a risk worth taking. And so the White House and 
Congress have pursued tax cutting and Social Security privatization with 
relentless focus, to the exclusion of almost everything else. As The New 
York Times columnist Daniel Altman has written, the president has chosen 
economic advisers such as N. Gregory Mankiw, Lawrence Lindsey, and R. 
Glenn Hubbard who support this singular view. "What you have in Washington 
now is an inability to get beyond the macroeconomic, to understand that 
there are so many other investments government needs to be making and 
actions it ought to be taking, and that our future is going to hinge in 
large part on what decisions we make there," Michael Mandel, the 
influential economist and columnist for BusinessWeek, told me in January. 
"And right now in Washington, they're not even looking at any of that."

Even when the Bush administration's leading economists discuss innovation, 
it is mostly in this light ÿÿ they argue that reducing the cost of capital 
will lead companies to invest in new technologies. They rely in part on 
the research of economists such as Dan Sichel of the Federal Reserve and 
Dale Jorgenson of Harvard, who examined the sources of the '90s boom and 
found that capital availability played an important role. But not even 
Jorgenson thinks this was the whole story: "You need something to invest 
in, and so all those other things you're talking about were crucially 
important too, in the long run," he told me in January. "If you're looking 
at Washington today, you have to ask, what are they doing to make those 
investments now?"

Bush v. Newt

The same White House that has been bold, and recklessly so, on 
macroeconomic policy has been timid, and recklessly so, on microeconomic 
policy. It has made only a few feints at such policies and investments, 
and compared to the relentless energy with which the administration has 
pursued tax cuts and Social Security reform, its attention to such 
microeconomic strategies has been only tepid, intermittent, Potemkin-like 
ÿÿ done to quiet a constituency or send a political signal.

A good example is broadband. Most experts predict that when a critical 
mass of homes and businesses acquire high-speed internet connections, an 
explosion of economic growth will follow as whole new industries, such as 
video-conferencing and online video gaming, become possible. But these new 
industries are likely to flourish in whichever countries achieve 
near-universal broadband first, and at the current pace, that won't be the 
United States. For four years, the FCC has pursued a "deregulatory" 
telecommunications policy that has effectively blocked competition, giving 
phone companies little incentive to build out their broadband networks. 
Over the same period, the United States has dropped from 4th to 10th in 
the world in percentage of its homes and businesses with broadband. Not 
surprisingly, South Korea, which is first on the list, is now the world's 
leader in developing online video games, the fastest-growing segment of an 
industry that's bigger than movies, and its software companies are 
beginning to lure top American programmers to Seoul.

Early last year, Sen. John Kerry (D-Mass.) began to use a line in his 
stump speeches that challenged the president on America's declining 
broadband position. The president responded by proposing the goal of 
achieving "90 percent broadband access" by 2007. The goal was 
bold-sounding but empty: By most measures, 90 percent of Americans already 
have "access" to broadband in the sense that they could, if they wished, 
sign up for it; the problem is that, compared to other countries, 
relatively few Americans have done so.

A similar inattention has held in wireless ÿÿ a technology that venture 
capitalists believe would explode if the government would make a simple 
regulatory change. Since the president came into office, bankers, venture 
capitalists and economists have been urging the FCC to reassign unused, 
high-quality spectrum that is now reserved for television broadcasters and 
the military. "Nobody was using this," says Wharton's Kevin Werbach; 
reassigning it was "a no-brainer." The FCC, under Chairman Michael Powell, 
did nothing for two years and then delegated the matter to a task force to 
investigate how best to reassign spectrum. The task force reported two 
years ago, but the commission has still not begun to reassign spectrum. 
Meanwhile, the United States has fallen only farther behind in wireless 
technologies to European and Asian firms.

But there is perhaps no economic sector that is undergoing a more profound 
evolution, or in which government investments could make a bigger 
difference, than energy. As India and China continue their rapid 
industrialization, and with it their need for oil, analysts predict that 
the price of oil, already sky-high, will grow even more prohibitive ÿÿ 
which means that whichever companies develop the most effective 
alternative fuels and energy-efficiency technology will revolutionize the 
industry, and whichever countries can produce those breakthroughs may 
become rich on it, the Bahrains of the 21st century.

Right now, however, the United States is not poised to be one of those 
countries. Demand in America for electric-gas hybrid cars already 
outstrips supply, but Ford is so behind the curve that it's leasing its 
hybrid technology from Toyota. Europe, meanwhile, is setting the pace on 
the next promising auto technology; clean diesel-electric hybrids. 
Companies in Europe and Asia have also made more progress than have their 
American counterparts in developing the technology for crafting 
energy-efficient appliances, offices, and factories ÿÿ a consequence of 
higher energy taxes and stricter environmental regulations in those 

The Bush administration's most vigorous response to all this has been to 
increase the funding for research into hydrogen-powered cars. Hydrogen 
technology is promising. But it is also decades away from the market, and 
even hydrogen buffs believe the administration has gone about its program 
the wrong way, trying to build fuel cells before figuring out the more 
daunting challenges of how to extract and transport hydrogen. Moreover, 
there's a creeping suspicion that hydrogen may end up being far too 
expensive to compete with other, more feasible, and probably cheaper fuels 
like biomass ethanol, a technology in which America happens to be a 
leader. Betting on a single alternative fuel source, hydrogen, at the 
expense of others is a classic case of "picking winners and losers." The 
truth is, no one knows yet which technologies or energy sources will 
define the future.

A better strategy, says Harvard's John Holdren, would be for the federal 
government to raise automobile fuel efficiency (CAFE) standards, impose a 
carbon cap-and-trade system for factories and power-plants, and let the 
market decide which new energy sources and technologies are the best. 
These ideas now have broader backing than they did a decade ago. The 
bipartisan National Commission on Energy Policy issued a report in 
December calling such measures the most critical to ensure America's 
energy future ÿÿ and that commission's members includes the CEOs of 
old-line energy giants such as Exelon and ConocoPhillips. And, Holdren 
told me, executives at old economy companies from Monsanto to Dow Chemical 
have signed on. "Five years ago, we didn't have a shot at getting them on 
board," said Holdren, "but the situation is getting dire enough that now 
they're leading the charge." Still, many sectors, including the automobile 
and power industries, vehemently oppose higher CAFE standards and carbon 
emission limits, and the president has repeatedly rejected them.

There is no better example of the administration's Potemkin-style 
microeconomic policy than the way it has handled the issue of rising 
medical costs. Here, the administration has talked a good game. During 
last year's presidential campaign, the president vowed to bring health 
care out of the "buggy and horse days" by getting the industry to adopt 
information technologies, such as electronic medical records-keeping and 
systematic case-management systems, which experts say could save hundreds 
of billions of dollars and tens of thousands of lives. To this end, he 
promised a new $50 million health care IT initiative. It was an absurdly 
small amount, and probably no match for the perverse incentives that keep 
for-profit medicine from investing in these technologies (see "Best Care 
Anywhere," January/February 2005). But at least it was something.

That is, until the president signed his 2005 budget into law, which zeroed 
out the $50 million program. David Brailer, the economist and physician 
the White House had put in charge of the program, wound up with no money 
to do anything to install information technology in hospitals ÿÿ no pilot 
programs, no cash for education, no seminars for hospital executives. Newt 
Gingrich, the right's high priest of health IT, told The New York Times 
that the president's defunding of his own program was a "disgrace." (After 
Gingrich's hue and cry, the White House put the money back in the proposed 
2006 budget it submitted to Congress, though some insiders remain 
skeptical that the program will survive).

Faster, Faster

Technology today is diffusing faster than ever. As the Council on 
Competitiveness has noted, it took 55 years for the automobile to spread 
to a quarter of the country, 35 years for the telephone, 22 years for the 
radio, 16 years for the personal computer, 13 years for the cell phone, 
and only seven years for the Internet. Because technologies are adopted so 
quickly, it has become more important than ever for a country's industries 
to be at the cutting edge ÿÿ there's simply much less catch-up time. (Fall 
five years behind on building car factories in the early 20th century and 
you lost some profits; fall five years behind on hybrid cars and you may 
have lost an industry).

For this reason, the last four years of drift may have already done 
significant damage to America's long-term economic prospects. The pity is, 
there was no good reason for the drift. Finding ways to strengthen border 
security while still providing enough visas for educated immigrants and 
graduate students is hardly the world's most difficult public policy 
challenge, and every Fortune 500 corporation in America would cheer such 
moves. There are no serious ideological reasons why both parties couldn't 
support reform of patent laws (though certain powerful interest groups 
would object). It's hard to find a good excuse for why we're falling 
behind on broadband, or have failed so far to reassign valuable wireless 
spectrum. (Indeed, a country which until recently had large budget 
surpluses should by now have found the money to begin wiring the country 
with fiber-optics, providing higher-quality streams which can transport 
large data files far faster than broadband.) And even the most politically 
difficult actions, such as raising CAFE standards and imposing a flexible 
carbon emissions cap to spur energy innovation, should have been possible 
after 9/11, with the nation willing to make sacrifices and dire warnings 
from all political wings about our dependence on Middle Eastern oil.

But what worries economists even more than the past four years of drift is 
the prospect of continued inaction. The speed of technological change is 
now too fast, and the economic competition too fierce, for America to 
afford that. There is no law that says the United States will be the 
world's pre-eminent economic power forever. But neither is there any 
reason we can't rise to the challenge, as we did in the 1980s and 1990s. 
Then, as now, becoming more innovative is the solution to our problem. But 
first, we must recognize that we have a problem.

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