The Great Recession has been officially over for five years, but it sure doesn’t feel that way. Fewer Americans are working than before the Recession, and the reason the unemployment rate is not even higher is because just 62.8 percent of potential workers are in the labor force, a 35 year low. Both the federal budget and trade deficits remain unsustainably high. U.S. companies are sitting on, rather than investing, close to $2 trillion in cash reserves. And some regions remain mired in recession, with some cities, like San Bernardino and Detroit, filing for bankruptcy.
But by most accounts, this is all the result of an uncommonly severe but ultimately survivable financial crisis, akin to the destruction wrought by a category five hurricane—immense and random, but with recovery largely assured. The pundits tell us not to worry: things will get back to “normal.” Housing prices will go back up, unemployment will go down, and economic confidence will return. Eventually.
But in fact, neither the Great Recession nor the painstakingly slow recovery can be attributed simply to a random financial crisis caused by the burst housing bubble. Rather, a major contributing factor to both has been the United States falling behind in the race for global innovation advantage.
Indeed, since the late 1990s, the United States has been losing out to other nations when it comes to competitiveness and innovation. America lost almost one-third of its manufacturing jobs from 2000 to 2011, a share greater than in the Great Depression. Investment by foreign companies to build factories or offices in America has declined 6 percent every year for the last decade. Overall business investment in new equipment and software is down about one-third over the last three decades. And the United States ranked forty-third out of forty-four nations in the rate of progress in innovation-based competitiveness (e.g., measures like research and development spending and new businesses being started). Indeed, for the first time in American history more U.S. patents are awarded to non-U.S. firms than U.S. firms. As a result, the United States ran a trade deficit in goods of $7 trillion in the last decade.
This massive loss of competitiveness meant that the demand for capital to invest in wealth-creating investments like research and factories fell sharply, and rather than downsize in the face of reduced demand for their capital, Wall Street doubled down on the housing-market Ponzi scheme.
And since then the recovery has been hobbled by a steadily increasing trade deficit, up 23 percent since 2009 including a large deficit in high technology goods, which in turn is a reflection of declining competitiveness.
One big reason for this decline is that other nations have raised their game. They now 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.
We see this all around us. Two decades ago U.S. corporate tax rates were on par with Organization for Economic Cooperation and Development (OECD) nations, but because these nations have cut their rates, today America’s corporate tax rate is 10 percentage points higher than the OECD average. America’s research and development tax credit went from the most generous in the world in the 1980s to just 27th today. While the federal government provided more funding for science than the rest of the world combined in the 1960s, a number of nations now invest significantly more in R&D as a share of their economies than we do. And many other governments also directly support industry-university research partnerships to help their companies have the best technology in the world when they have to go out and compete.
But while other nations are setting their sights on winning the race for global innovation advantage, America remains largely asleep, convinced of its own innate economic superiority, 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 unwilling to make the kinds of investments in the future needed to win this race.
That being said, America is not preordained to lose this race. Indeed, we Americans hate to lose. But winning will require both the public and our policymakers to recognize that we are in a race for our economic future and this will require not just sacrifice but bipartisan cooperation to establish a robust national innovation-based competitiveness agenda.
