Would another space race generate enough R&D buzz to lift the US out of its productivity lull?
Would another space race generate enough R&D buzz to lift the US out of its productivity lull?

How can the US regain its mojo on R&D?

In the first of a three-part series looking at innovation in the US economy on the cusp of a new era, Orla O'Sullivan asks whether the government ought to do more

January 3, 2017 2:21 PM (UTC+8)

While the US has never spent more on research and development, the government’s share has never been less. That’s a risky strategy. Why  rely on the scattered efforts of private firms that are beholden to quarterly profit expectations to develop the next big idea?

The balance must shift if the US is to regain its technological and manufacturing edge, some say, calling for a big, government R&D push centered around military/aerospace research. China has already displaced the US as the world’s biggest economy, if one adjusts for currency, according to the IMF. And it’s on track to displace the US as the country that spends most on R&D.

Most US R&D goes to the military now and further military funding seems likely under a Republican administration, especially with President-Elect Trump calling for “an arms race.” Meanwhile, China announced plans to be first to land on the far side of the moon.

Trump has also promised corporate tax cuts, which might encourage US corporations to repatriate some of the estimated US$2.5 trillion sitting offshore and invest it in new ventures arising from a burst of scientific invention.

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The inventor Henry Kressel played a key role in two of America’s biggest claims to technical fame: landing a man on the moon and the creation of the Internet. The 1969 moon landing followed the highest ever investment in R&D by government. It peaked near 2% of national income, in 1965, and is now down to about a third of that.

Kressel is one who can’t imagine breakthroughs of such consequence coming from the private sector. When he made semi-conductor lasers commercially viable – a pre-requisite for fiber optic communications and a host of applications from laser surgery to DVDs — he was a director at RCA Labs, working on a Defense Department mission to illuminate enemy fighters at night.

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Inventor Henry Kressel played an important role in making semi-conductor lasers commercially viable.

“Those kinds of corporate development labs no longer exist,” says Kressel, citing the now-defunct RCA and Bell Labs as examples. Now a venture capitalist, he has doubts about “what they call R&D” today in the private sector.

US companies conducted a record 69% of the country’s R&D in 2015. This is in line with international trends in developed economies. However, economist and Asia Times columnist David Goldman doesn’t believe corporations are likely to risk the time and money it takes to make real breakthroughs. “General Mills might spend a lot of money figuring out how much sugar to put on its Frosted Flakes but game-changing R&D usually comes from government. Everything that goes into a smart phone today really comes out of the Cold War.”

“General Mills might spend a lot of money figuring out how much sugar to put on its Frosted Flakes but game-changing R&D usually comes from government”

The US rode the ecommerce wave to its last peak in productivity, in 2005. Yet sources agree that it will take more than incremental improvements in personal computing to restore US productivity to its former heights.

Moreover, internet companies — often famously low employers— arguably add little to the economy. For example, Facebook, with almost US$333 billion in market cap and fewer than 16,000 employees, displaced a whole lot of traditional media industries and the jobs they provided.

Trump has promised to bring back manufacturing to the US, which Goldman notes will require not just ideas, but the right education and manufacturing processes. The US now typically imports items it originally invented, World Bank data shows.

Lower wages drew US manufacturers overseas, but Kressel says some manufacturing jobs can’t go offshore. “We couldn’t have the core components of the F-35 [fighter jet] being built in North Korea even if it is cheaper.”

Both Kressel and Goldman say military/aerospace R&D would provide necessary boosts to both the economy and national security. A 1985 study Goldman conducted for the National Security Council echoed a previous one suggesting that the Apollo moon mission returned US$7 to the economy for every dollar spent.

‘Only our thinking is limited’

Scientists consulted disagreed that military research is automatically the most valuable type, whereas economists disagreed that R&D could necessarily extricate the US from its recent productivity lull.

A Unesco report makes the R&D:GDP relationship look linear. It shows China’s share of the G20 countries’ R&D grew to 19.6%, from 13.8% in the five years to 2013, as its share of gross domestic product grew to 16.1% from 13.4%.

 

It’s worth remembering, though, that funding was interrupted in most western countries after the 2008 economic crisis. And there are other considerations: developed economies don’t grow as fast as emerging ones; an aging population won’t be as productive; service-based economies can’t be revolutionized by automation.

Moreover, maybe the big discoveries have simply been made. That idea is prevalent but rejected by scientists, including Brian David Johnson, a futurist at Frost & Sullivan Research, who future-proofed Intel’s industry-leading computer chip. “Our thinking is limited, innovation isn’t,” he says.

The next scientific frontier? “To go from digital technology to biology and back. It’s so new we can’t even imagine what we could do,” Johnson says. Already bacteria have been encoded with information, making them, in effect, computers running on sugar.

On a gloomier note, some economists see lower US productivity as the new normal. Jim O’Sullivan, an award-winning macroeconomist at High Frequency Economics, a New York consultancy, says some consider America’s high productivity of the 1960s, 70s and 90s as “aberrations.”

“We have no theory of technology. Skills and ideas matter. But quite how we don’t know”

“It’s a big question why productivity is slowing,” he said. “Productivity is going up, but by 0.5% on average lately, versus more than 2% on average in the 30 years to 2005.” Some recent quarters have in fact shown zero growth, even with job levels restored to what’s considered full employment post-crisis.

Quarterly government statistics relating to the standard measure of productivity — total economic output (GDP) divided by workers’ hours – do certainly show a dropping off in the past decade. However, another measure of productivity – total factor productivity (TFP) — factors in technological dynamism and is more intangible. “We have no theory of technology,” said Mark Blyth, PhD, a noted economist at Brown University. “Skills and ideas matter. But quite how we don’t know.”

For Goldman, the equation is simpler. “You can reasonably correlate R&D with productivity,” he says. “We have to make the effort.”

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