America is No Longer Great

America is no longer great, according to two prominent economists. In a new book, they present a compelling argument that the U.S. is rapidly losing its technology edge to China. The culprit is a lack of public investment in research and development, something not easily remedied.

Between 1947 and 1970 median family income in the U.S. doubled, but over the next 45 years it increased by only 20%. Why this is so is a mystery that economists have been trying to solve. Now two economists, Jonathan Gruber and Simon Johnson, who are both professors at MIT, in their recent book, Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream, write that the reason is because the United States government invested heavily in basic research and development in the earlier years, but the funding dropped off in the later years. And, Gruber and Johnson say, America can experience that kind of growth again – with more evenly distributed benefits, as in the earlier era – by greatly increasing targeted public investment in R&D.

In many ways this book is a natural follow-on to a book I reviewed in 2013, The Entrepreneurial State, by Mariana Mazzucato. In that book, Mazzucato showed that government provided most of the risk-taking investment that led to the bulk of the technological innovations of the last 70 years.

Gruber and Johnson reiterate and extend Mazzucato’s arguments. From 1940 to 1964, motivated largely by national defense concerns and mostly coming from the defense budget, U.S. federal spending on R&D increased by a factor of 20, reaching two percent of annual gross domestic product in the mid-1960s. It funded most of the innovations we take for granted now, which we often erroneously attribute entirely to private sector entrepreneurship.

For example, Gruber and Johnson point out, “the R&D behind the integrated circuit was largely paid for by the government” and “NASA and the military were by far the most important clients of the semiconductor transistor business in the early days,” providing a further subsidy to its development. They say that, “Almost everything about your computer today – and the way you use it – stems from government funding at the early stages.” As Mazzucato showed, this applies to the smartphone as well.

But, starting in the late 1960s, government funding for R&D declined to only 0.7% of GDP. The private sector, Gruber and Johnson say, especially venture capitalists, cannot and do not make up for this loss by taking the deep-pocketed investment risks in R&D that governments can take.

There are many reasons for the drop-off. The existential threats of World War II and the Cold War waned toward the late 1960s. Gratitude for defense-related funding cooled in academia with the Vietnam War, while gratitude for the work done by academics in science and technology cooled among other sectors of the populace. And then there was, of course, the increasing strength of the anti-tax and anti-government movements.