Prescription for Productivity

Everyone thinks the United States needs more innovation—to shore up economic growth, to generate more jobs, to improve schools, to improve health care—and so we have a profusion of academics, think-tank experts, and federal officials proposing innovation agendas. But this book is more than a 10-point list of actions. The authors frame the argument for why the United States should adopt an explicit innovation policy and then suggest how such a policy should be crafted in light of both U.S. political and economic history and the policy stance of other countries.

Along the way, the authors take a hard swipe at economists in prominent policy positions who in their opinion have failed to provide leadership on innovation policy and a foreign policy establishment that focuses on political objectives without considering consequences for U.S. economic competitiveness.

The book begins by making the scariest possible case that the United States is in decline. “Look at Britain” is their main argument. Britain ignored growing trade deficits and declining manufacturing capacity, and the United States is on the same trajectory. The story is not that simple.

First, the U.S. trade deficit is largely a product of a low national savings rate. It is said: “America spends, Europe balances, and Asia saves,” and that seems all too true. The standard macroeconomic solution to that problem might include some aspects of what the authors call innovation policy, such as tax credits for productivity-enhancing investments, but it would most likely not include actions that aimed to shore up the domestic base of an industry or sector (as these authors would do for the U.S. tech sector).

Second, the persistence of trade deficits does of course play out in the demise of certain domestic industries, but that is not all that happens in an economy running trade deficits. In a country such as the United States with strong laws and institutions, capital willingly flows into the country as foreign direct investment, purchases of U.S.-issued securities, real estate investment, etc. And although the financial crisis and Great Recession make the reading of recent trends difficult, foreign direct investment in the United States remained relatively strong through 2007, which seems prima facie evidence that Atkinson and Ezell are off base in their contention that the negative U.S. trade balance discouraged business fixed investment in the United States.

Now, it is also too true that economists often fail to acknowledge the importance to the public interest of maintaining a domestic base in certain industries, such as aeronautics and electronics for national defense. But this political reality does not negate the fact that the root cause of persistent trade deficits is low national savings. Rather, it suggests that policymakers in countries running trade deficits need to closely monitor the composition of national investment, and perhaps even tinker with it. It is much easier to shift the composition of investment than it is to engineer a turnaround in private (much less public) spending/saving propensities.

Third, advanced countries, not just the United States, lost their edge in terms of productivity growth more than 15 years ago. Nevertheless, the United States is still the world productivity leader. Estimates of 2010 average labor productivity corrected for price differences across countries indicate that the level of U.S. average labor productivity exceeds Europe’s by 25%, Japan’s by 30%, China’s by 85%, and India’s by 90%. These differences, especially the latter two, are likely to shrink in coming decades, but a convergence in average productivity levels is not a decline in U.S. productivity except in a relative sense.

Science’s role

Because innovation involves the introduction and spread of new and improved products and processes broadly in the economy, innovation is said to encompass, but to be more than, scientific invention. An economy may be more productive because marketing research led to the creation of new services or better product design, new human resource practices led to more effective workers, etc. Such innovations, and their diffusion, may have little or nothing to do with knowledge gained through scientific R&D, although they may be, in some cases, complements to investments in R&D and information technology.

A broad view of innovation does not, however, contradict or undermine the importance of science policy, whose core mission is public support of basic research. The economists Richard Nelson and Kenneth Arrow made the case for public research funding using a market failure argument more than 50 years ago. They argued that private-sector investment in basic research is less than optimal, because a full return on investment is not realized by the knowledge creator. Because private agents, acting alone, will fail to undertake a socially desirable amount of scientific experiments to generate new knowledge, public funding of basic research is desirable to generate social and economic benefits.

A link between public R&D spending and productivity growth is not necessary to justify the government investment. This is not to say that such a link is not there. It surely is, but the benefits are far from immediate. Thus, although the consequences of public research support are potentially far-reaching in terms of long-term economic growth, increasing public spending on basic research is not a means for shoring up economic growth and fostering innovation in the near or medium term.

Getting it right

Atkinson and Ezell’s innovation policy is consistent with the reality that technological advances and scientific discoveries must somehow be sold or commercialized in private markets to be economically beneficial to society. They argue that if national policies governing business regulation and taxation are not just right (i.e., neither too laissez-faire nor too mercantilist), a nation will lose in the global economic race. On the one hand, for example, they suggest that national and local policies are needed to support small specialist businesses (such as small parts suppliers), whose participation in large global value chains creates risks for them beyond their control. On the other hand, they acknowledge that a nation must accept that innovation entails business closures and job losses and that new technologies bring with them uncertain social and environmental impacts.

Atkinson and Ezell sound, at times, schizophrenic about just what is needed to promote rapid productivity growth, but there is a reason for this. Everything we know about U.S. productivity and job growth, including the determinants of business location, suggests that regulations and institutions that promote effective competition in labor, capital, and product markets are associated with innovation and economic growth via Schumpeterian “creative destruction.” What must be tolerated at the individual business level cannot be tolerated at the aggregate national level, according to Atkinson and Ezell. Hence the inherent schizophrenia (i.e., the United States cannot fail even though some of its businesses must!)

Atkinson and Ezell provide numerous examples from across the globe of what they consider good and bad innovation policies. They suggest, for example, that Europe’s strategy is inhibited by an internal contradiction. Although Europe has developed ambitious policies to promote innovation, many European countries are unwilling to accept the constant economic transformation that goes along with the lightly regulated labor and product markets the continent needs to achieve more innovation. Likewise, Japan’s stated commitment to innovation is undermined by its unwillingness to restructure its inefficient service industries.

In the final analysis, Atkinson and Ezell offer as innovation policies what are essentially aggressive versions of existing science and fiscal policies: first, an innovation investment tax credit (covering R&D, worker training, and traditional capital investments); second, about $30 billion more per year of public R&D spending; and third, the establishment of a National Innovation Foundation that helps businesses to become more innovative and competitive through technological and organizational change. Germany has successfully implemented this formula, and the United States has previously implemented some of these strategies (although not on a national scale).

They also want technology road-maps and a coordinated attempt across disparate departments of government to promote strategic sectors of the U.S. economy. In the national defense and energy areas, such initiatives are already in place. And we have the America Competes Act (2007 and 2010), the Jumpstart Our Business Startups Act (2012), and a host of recent initiatives such as a National Export Initiative, a National Network for Manufacturing Innovation, and the recently announced (but underfunded) BRAIN Initiative. But it doesn’t hurt to advocate beefing up and better coordinating these programs.

Finally, Atkinson and Ezell conclude their book with a novel call for a global innovation system, a new Bretton Woods, they say. They propose a framework that recognizes that the post- World War II commodity-based manufacturing economies are now specialized innovation economies and that the free flow of finance and trade is no longer sufficient as a tool for the promotion of global economic growth. They argue, for example, that today’s World Bank policies that encourage export-led growth are actually a beggarthy-neighbor form of innovation mercantilism and need to give way to the win-win strategies built on global collaboration. This discussion is insightful, especially when thinking about manufacturing and science-based innovation.

Gaps

Although this book offers a very thorough discussion of most aspects of innovation, some gaps exist. For example, the notion that innovation involves feedback from customers is completely missing. Investments in market research and customer relations are as important as investments in the techheavy R&D, training, and traditional capital investment favored by Atkinson and Ezell. A second missing factor is that tradable business, professional, and financial services could also be a source of U.S. global competitive advantage. Service industries are largely dismissed in this book, even though many U.S. business service firms are world leaders.

Finally, the authors do not consider the communications and public understanding dimension of innovation policy. The macroeconomist in me suspects that much as monetary policy works through communications and “anchoring” of inflation expectations, an effective innovation policy needs to operate through anchored expectations of robust long-run economic growth, if you will. We are unsure just how much business and consumer optimism can be boosted via a concerted policy to communicate how national innovation policies can accelerate the economy’s rate of growth, but we do believe that economic optimism leads to new hires and new investments in innovative capacity in the short and medium run.

Innovation policy is an imperative according to these authors. The imperative is based, in my opinion, on an exaggerated case for “America in decline,” but this is not to deny the serious fiscal challenges that face this and other advanced countries, challenges that robust business productivity growth can help solve. The authors’ argument for including a global dimension in national economic policies is an important contribution.

Their analysis of the political economy of global innovation reveals that fostering robust productivity growth is not simple. It requires many conditions and path dependencies to be in place. And because there are many ways of building and sustaining innovative capacity, a strategic approach to national policymaking, one in which current capabilities are routinely assessed and evaluated as suggested by these authors (and attempted in Europe and elsewhere), would seem to be warranted.

In the final analysis, however, the conduct of innovation policy is complex because the determinants of entrepreneurship, innovation, and productivity growth are themselves complex and not all that well understood. I am reminded of an insightful analysis of productivity growth conducted by Zvi Griliches many years ago, in which he inquired whether a decline in public R&D that began in the mid-1960s contributed to the decline in business-sector productivity growth in the early 1970s. Griliches found no connection, but he likewise found no compelling evidence to support any other explanation, despite the many culprits examined in his inquiry. Rather like Murder on the Orient Express, Griliches concluded, they all did it!

The many-faceted nature of actions needed to stimulate the growth potential of a country such as the United States is most assuredly not a reason for ambivalence toward innovation policy. But it is a reason to have a national policy that can be clearly communicated to business and consumers. These authors have made a start at doing that, and although many economists will not agree with the reasoning behind their arguments, what is clear from this study of the political economy of global innovation is that there are many pathways to building and sustaining greater innovative capacity. We just need to be sure to get on one.

Carol Corrado ([email protected]) is a senior advisor and research director in economics at The Conference Board and senior policy scholar at Georgetown University’s Center for Business and Public Policy.

Our better selves?

Medical science gives us many ways to improve ourselves and our offspring, and in How to Build a Better Human: An Ethical Blueprint, Gregory Pence highlights a number of them, including folic acid to prevent birth defects, in vitro fertilization, modafinil and other stimulant drugs, cosmetic surgery, performance-enhancing drugs in sports, antidepressants, personalized genomic medicine, preimplantation genetic diagnosis, “eugenic” abortion, vaccinations, and cloning. In clear language accessible to nonexperts, Pence details the development of these technologies and the ways in which they work. He supplements his technical discussions with ethical analyses in which he probes the value of these interventions and how society should react to them. Should women obtain cosmetic surgery, he asks, in order to feel better about themselves? Should students use drugs to do better on exams? Is it wrong to live longer? To use stem cells? A philosopher intent on stepping outside of the ivory tower, Pence ends by presenting six practical proposals to move us forward.

When we explore these ethically treacherous waters, Pence prudently counsels us to reject the rigid worldviews of both “alarmists” and “enthusiasts.” The former, comprising bioconservatives such as Leon Kass, Jeremy Rifkin, and Bill McKibben, hold simplistic beliefs about the virtue of what is “natural” that rest on what Pence calls “pessimistic religion,” which, he claims, “always opposes medical innovation,” as demonstrated by religious resistance to the use of anesthesia in childbirth. The enthusiasts, on the other hand, are exemplified by the transhumanists, whom Pence criticizes as ethical libertarians with overly optimistic views about everything from robotic surgery to genetic engineering. Pence does not sit squarely astride the fence, however; since the alarmists for decades have received more publicity and skewed public policy in their favor, Pence argues that it is “time for a little enthusiasm,” so long as it is combined with a healthy dose of ethics. Pence also cautions us against perpetuating “a depressing mistake that has infected bioethics for a half-century: lumping too many different kinds of cases together.” One apt example that he gives is conflating genetic modifications that affect only somatic tissues with alterations to the germ line that can be passed on directly to one’s children. These pose different risks, observes Pence, and therefore “should carry different orders of concern.”

Unfortunately, Pence makes the very mistake that he warns us against by constantly shifting from enhancements to therapeutic interventions within the same ethical analysis. How can we object to cosmetic surgeries such as breast implants and liposuction, he asks, when surgeons also replace hips? What’s wrong with using alertness drugs to improve performance on bar exams when the same drugs combat the mental infirmities of aging? Why oppose genetic engineering to enhance children when there might be a gene-based vaccine to protect them against cancer? Certainly it is not always easy to distinguish enhancements from therapeutic interventions. The difference often turns on notions of what is “normal” versus “beyond normal,” and normality is a muddy, shifting, and often arbitrary concept. Grey areas abound. For example, is a drug that prevents athletes from sustaining muscle tears during training an acceptable way of preventing injuries or an objectionable means to enhance performance? (This happens to be the effect of taking anabolic steroids.) Yet keeping enhancements and therapies separate to the extent possible is essential for ethical discourse; otherwise we would find it just as compelling to spend tax dollars on improving cognition in people with an IQ of 170 as on improving the executive function of people with mental disabilities.

Pence also sometimes ducks difficult issues by imagining them away. For example, he asserts that we need not be concerned that parents will use prenatal genetic testing to select embryos for implantation because so few parents are doing so, thereby ignoring the likelihood that the practice will expand as tests for more conditions and traits are developed and as prices come down over time. People will not mate to maximize enhancement, he declares, but for “sex, love, marriage, and status,” notwithstanding a burgeoning industry in which people buy eggs and sperm for reproduction based on factors such as the donors’ IQ and whether they graduated from an Ivy League college. Pence also doesn’t think that we need to worry that genetic engineering will change human nature, stating that “genetic experiments on babies will not be allowed because they’re dangerous, will be extraordinarily complex to evaluate, and never gain ethical traction.” But it is impossible to know what will happen in the future—for instance, whether a country with a different ethical tradition than ours will seek to improve the genetic stock of its population and trigger an international gene race. Moreover, genetic experiments on babies are already being carried out, for example, in France in an effort to repair nonfunctioning immune systems. Sure, these experiments are aimed at curing disease rather altering non-disease characteristics, but Pence hardly can rely on this distinction here when he doesn’t do so elsewhere in his book.

The highpoint of Pence’s book is the chapter on living longer. He begins by taking philosopher Bernard Williams to task for objecting to immortality because it would make people’s lives not worth living; if this were so, replies Pence, then people simply would end them. He then engages more substantive arguments: that extending life would waste resources (then why, he asks, have we spent so much on improving sanitation and other living conditions); that longevity is not natural (why is the lifespan of say, fortyseven years in the United States in 1900 more or less natural than living into one’s eighties?); that living longer would be foolish and boring (not if it was a life worth living); that the pursuit of longevity would lead us to spend too much during the last few months of life (which only seems apparent if we ignore the people who survive substantially longer as a result of what is spent on them); that people who want to live longer are selfish (not if they use the extra time to create wealth and welfare for others); and that family relationships would suffer (not if new arrangements could be negotiated). The final objection that he considers is that we can’t afford longer living because it would bankrupt entitlement programs such as Social Security and Medicare. Pence offers two responses. The first is the obvious one that people must pay more up front and/or receive reduced benefits. Pence’s second suggestion is to make illegal immigrants pay double in order to become legalized. This would not be unfair, he maintains, since they would be better off being legal or being here than remaining (or returning to) where they originated. Putting aside the fact that illegal immigrants on average earn far less than native-born workers, so that requiring them pay twice the amount of FICA and Medicare taxes would be especially onerous, it seems off for an ethicist to suggest that we can treat immigrants however we wish so long as it is better than they would be treated where they came from.

If the chapter on living longer, notwithstanding the immigration peccadillo, is the best, the most disappointing discussion in Pence’s book concerns doping in sports. He accepts uncritically the National Institute on Drug Abuse’s claims about the health risks of anabolic steroids, for example, despite the lack of scientific support. He cites the suicide of wrestler Chris Benoit as evidence of the risk of steroids without mentioning the autopsy that showed that he had chronic traumatic enceph-alopathy, a degenerative condition produced by repeated concussions that is usually seen in boxers and that causes depression and erratic behavior. He asserts that “anything not legally open to all competitors should be banned. So the controversy among users and nonusers about the long-term safety of using steroids is moot. Steroids are used to gain an unfair advantage.” In other words, steroids are against the rules, so they should be against the rules, and therefore there is no need to consider how safe or unsafe they are. Pence also calls the fact that a doctor provided steroids to a large number of police officers and firefighters “bizarre”; perhaps it is bizarre that the same doctor provided the drug to so many individuals, but insofar as steroids increase strength, why is it so bizarre that police and firefighters want to use them? Finally, Pence joins other misguided anti-doping opponents in objecting to the use of performance enhancement in sports because they are not “natural.” The blood that is withdrawn from athletes and then re-infused right before a competition in the most classic form of sports enhancement is as natural a substance as it gets, and for that matter, when did Pence last see a Gatorade tree?

Several of the proposals at the end of Pence’s book are calls to study the safety, efficacy, and comparative effectiveness of enhancements, including paying for the studies with public funds. Safety studies certainly make sense, since without them there will be a lack of good data on just how dangerous certain popular enhancements might be, but Pence’s call for effectiveness studies, such as a comparison of caffeine, modafinil, and amphetamines in “mental competition,” is interesting in view of his opposition earlier in the book to the use of public funds to “subsidize” enhancements. He also recommends creating a database to collect anonymous reports of adverse experiences submitted by people who attempted to enhance themselves; if enough people filed reports despite the social stigma associated with enhancement use, the database could join the National Survey on Drug Use and Health and the emergency room Drug Abuse Warning Network operated by the Substance Abuse and Mental Health Services Administration within the Department of Health and Human Services as part of an early-warning system to identify enhancements that merited the formal evaluations that he advocates. Another of Pence’s proposals is for the Food and Drug Administration and insurance companies to “reject the old distinction between therapy and enhancement, and let people get reimbursed for developing enhancing drugs.” Since neither the FDA nor insurers sponsor drug development, Pence presumably means that the FDA approval process should be more hospitable to enhancements and that health insurers should reverse their policy of refusing to cover them. But he does not explain how insurers are to set premiums in light of the moral hazard associated with elective interventions such as enhancements. Pence’s final proposal is to reaffirm the need for different cases to be analyzed separately rather than lumped together. Once again, however, he fails to follow his own advice, regarding surgery that “normalizes” the facial appearance of a child with Down’s syndrome as “cosmetic and enhancing,” when many instead consider it to be reconstructive.

Maxwell J Mehlman ([email protected]) is Arthur E. Petersilge Professor of Law and director of the Law-Medicine Center at Case Western Reserve University School of Law and professor of biomedical ethics at Case Western Reserve University School of Medicine.