Still full of ideas, but not making jobs
America needs to share the benefits of innovation more widely
THE economy is recovering, yet American confidence remains mired at levels more commonly seen in recessions. For that blame unemployment, petrol prices and a deeper, nagging feeling that America is in decline. A Gallup poll in February asked Americans to name the world’s leading economic power. By a significant margin, they said China.
Barack Obama has exploited this anxiety. America, he has said, faces a new “Sputnik moment” and must “compete for the jobs and industries of our time” by spending more on research, education and infrastructure. But the notion that America is on the verge of being vanquished by cleverer, more innovative competitors is flawed. First, competitiveness is a woolly concept that wrongly supposes countries, like football teams, win only when another team loses. But one country’s economic growth does not subtract from another’s. Second, America’s ability to innovate and raise productivity remains reasonably healthy. The problem is that the benefits of that innovation and productivity have become so narrowly concentrated that workers’ median wages have stagnated.
Towards the end of the last decade American productivity began to slump, a sign to some that the pay-off from new information technology had largely been exhausted. But coming out of the recession productivity surged; it rose by 3.9% last year, the fastest rate since 2002. This was largely cyclical, since business output has recovered more quickly than hiring. Long-term productivity growth will be more modest, and its rate will depend on investment, human capital and innovation.
After collapsing during the recession, investment in business equipment has bounced back, rising 17% in the last quarter of 2010 from the figure a year earlier. Human capital is more of a challenge. Americans once led the world in educational attainment, but this is now barely rising while other countries have caught up (see article). That is a key reason why Dale Jorgenson, an economist at Harvard University, reckons overall productivity growth will average 1.5% in the coming decade, down from 2% in the previous two.
Innovation is what preoccupies Mr Obama. He worries that the next breakthroughs in energy, transport and information technology will occur elsewhere. His advisers fret that federal research and development has fallen sharply since the Sputnik era. But the picture is more encouraging once private R