by Benjamin Wallace-Wells

There is a moment in the lifespan of every cool new gadget -- two years after Bill Gates buys one, a year and a half after the popular press gets wind of it -- when its price drops enough to show up in significant numbers on the shelves at Best Buy, the electronic superstore. At this instant, the product becomes accessible for middle class Americans, something they can imagine themselves buying, and so these electronics stores have become temples to innovation, the place most Americans go to get as close to the cutting edge as most of them dare.

On weekend afternoons, Best Buy is bustling, full of grandmothers and kids tooling around with digital video cameras and geeked-out salesmen explaining to the moms that the cell phones in their hands have nearly the computing power of desktop PCs. But it's men who are the most transported, moving among departments with gawky reverence.

At a Best Buy I visited recently, I watched one dad gaze in wonder at row upon row of giant plasma televisions -- elegant silver-framed screens that seemed not just to capture the way the world looks, but to improve upon it. He watched bees extract honey from flowers, and spiraling footballs drop into the hands of receivers, and you could almost see a two-part thought process play out over his face: First, If I wait a year, these sets will be half the price. Second, Screw it, I'm buying one now!

But there was something else I noticed: Whereas a decade ago the most creative, groundbreaking stuff came from Silicon Valley, now it all seemed to come from overseas. The plasma televisions are from Korea; the cell phones are from Finland; the feature-packed digital cameras are from Japan.

Copying America

During the past six months, we have begun, quietly, to enter a newly tense moment, with university presidents, business leaders and columnists delivering ominous-sounding reports and editorials about the threat to American innovation posed by a freshly competitive world -- the renewed vitality of western Europe, Japan and Korea, and the ravenous growth of China and India.

"We no longer have a lock on technology," David Baltimore, a Nobel laureate and the current president of the California Institute of Technology, wrote recently in the Los Angeles Times. "Europe is increasingly competitive, and Asia has the potential to blow us out of the water."

What worriers like Baltimore are beginning to grasp is that these changes are emerging just as the American economy is being made more vulnerable by the movement of manufacturing and service jobs overseas. As a result, we've become increasingly dependent on maintaining our edge in discovering the new technologies and applications that create whole new industries -- just as other countries are closing that gap.

This is a fundamentally new threat. In the '70s and '80s, Japanese and European firms adopted American technology and made key improvements in process and design to shave cost and increase quality. Now, foreign companies are making many of the most important breakthroughs themselves. This shift is part of a change in strategy: Instead of copying our innovations, foreign governments have decided to copy our very model of innovating. They have studied our centers of invention, the Silicon Valleys and Research Triangles, where university scientists, venture capitalists, high-tech entrepreneurs and educated, creative workers, many of them from overseas, congregate. These creative centers, our competitors have learned, were the result of federal policy -- decades of investment in basic scientific research; patent law changes that allowed universities to capitalize on discoveries made in their labs; financial reforms that gave rise to the venture capital industry; and immigration laws that opened the door to talented foreigners.

Over the last decade, our competitors have implemented similar policies at home: They have built universities, reformed financial markets, invited in immigrants and made the development and adoption of new technologies national goals. Now they're reaping the benefits. The technologies behind plasma screens, for example, emerged and have been refined and expanded in labs under a research partnership between the Korean government and the electronics maker Samsung.

The Innovation Economy

This new competition from other developed countries, and the failure of America to fully keep pace, is one cause of our anemic job creation, three years after what was, by historical standards, a brief and fairly light recession. Another reason, of course, is the rise of China and India, where U.S. firms have not only moved manufacturing plants but also "outsourced" service sector jobs. America's employment base is being squeezed by these two pincers -- China and India from below, and the developed world innovating from above. Over time, those pincers may come together, as China and India also become proficient in high-end innovation. China is already opening universities at a breathtaking clip, while Intel, Hewlett-Packard, Microsoft and Verizon have all opened research labs there -- the kind that anchored the development of Silicon Valley.

"It's become inevitable," says Ross Armbrecht, president of the Industrial Research Institute, which is the think tank for the research arms of America's corporations, "that more and more of the most far-reaching innovations will be going overseas, to India and China, in the near future."

Economics is a negotiation in uncertainties, and so nobody's really sure what all of these changes will mean for the well-being of the American middle class. But when you survey economists, policymakers and business leaders about America's long-term future, it's hard to find many rank optimists: There are the Panicked, and then there are the Merely Tense.

Richard Lester, the head of MIT's Center for Innovation, told me he belongs in the latter camp: "Things look somewhat bleak in the long term, but if you look around Boston, at the incredible concentration of talent and opportunity here, we've still got a head start, and if we're smart we can probably build on it."

Among the Panicked are economists such as MIT Nobelist Paul Samuelson, who has recently argued that the rapid spread of innovative capacity to other countries with lower labor costs makes him doubt the whole doctrine of "comparative advantage," on which much of modern economics rests.

Sunny or Overcast?

On an overcast day in mid-December, President Bush assembled a group of CEOs at the Reagan Building -- a behemoth of a federal office complex that has become the favorite venue for small-government conservatives -- for a conference to promote his economic agenda. The tone of the conference, so soon after a winning election, was upbeat, cheery, back-slapping, the happy Chamber of Commerce banter of executives who have recognized a problem that they know how to fix. At the end of the day, the president himself took the stage. He said the economy was fundamentally strong and that government's role would be to "create an environment that encourages capital flows and job creation through wise fiscal policy." To do this, he said, he would ask for Congress to privatize Social Security and make his tax cuts permanent. He compared himself favorably to Franklin Roosevelt, then left the stage.

During the same conference, two floors up in the very same building, a group called the Council on Competitiveness held another event for the press, in which it laid out a very different vision. This group, comprised of 400 blue-chip business executives (the CEOs of IBM, Pepsi and General Motors, among others) and university presidents -- as rough an approximation of the American establishment as you could fit in a single room -- was nearly as downbeat as the president was buoyant. The astonishingly fast rise of international competitors, they warned, has meant that the American economy has reached an "inflection point," a "unique and delicate historic juncture" at which America, "for the first time in our history... is confronting the prospect of a reverse brain drain."

The report made a point of noting that the United States remains the world's dominant economy, the leader in fields ranging from biotechnology to computers to entertainment, but the CEOs nevertheless cited worrying evidence that this dominance might not last. For decades, the United States ranked first in the world in the percentage of its GDP devoted to scientific research; now, we've dropped behind Japan, Korea, Israel, Sweden and Finland. The number of scientific papers published by Americans peaked in 1992 and has fallen 10 percent; a decade ago, the United States led the world in scientific publications, but now it trails Europe. For two centuries, a higher proportion of Americans had gone to university than have citizens of any other country; now several nations in Asia and Europe have caught up.

When the newspapers reported the event the next day, the president's speech got front-page treatment. The CEO's presentation received only a short item on page E3 of The Washington Post, and no mention at all in The New York Times. This gap in media coverage reflected not only the power of a newly elected president to dominate the news, but also what might be called a macroeconomic bias. When the press and most Americans think of economic policy, they think of macroeconomic matters (tax rates, budget deficits, trade balances) whose fluctuations have instant, tangible effects on interest rates, stock prices, and exchange rates -- things newspaper readers and casual investors can see, track and relate to.

Bold Federal Strokes

But there is another set of ways in which Washington has always affected the long-term health of the economy: by making investments, regulatory changes and infrastructure improvement to spur the economy forward, creating new industries and giving new tools to old ones. This category of policies has not traditionally been given a single name but might best be called "microeconomic policy." Historically, this has been the heroic side of economic policy: The Louisiana Purchase may have been a shrewd maneuver for continental expansion, but it was also a jobs program for landless citizens eager to carve their own farms in the wilderness -- which is how Jefferson sold the treaty to Congress. The land grant college system, signed into law by Abraham Lincoln, provided the nation's farmers with expert guidance on the latest agricultural techniques to improve their crop yields. The creation of the federally guaranteed 30-year mortgage proved the decisive tool in the growth of the post-war American suburb.

These and other investments and regulatory changes aren't merely tools of the past; it is impossible to imagine the '90s boom emerging without them. Early investment from the Pentagon helped nurture the Internet. And the algorithm that powered Google was developed when co-founder Larry Page, then a Stanford graduate student, won a federal grant to write a more efficient sorting and search engine for libraries.

For most of the country's history, both political parties have favored various microeconomic initiatives -- though Democrats have been more comfortable with using government to intervene in the marketplace, while Republicans have tended towards a laissez-faire approach that stressed lowering the cost of capital.

Under President Bush, however, the GOP's natural economic policy tendencies have been hyper-charged by a grand political vision. Karl Rove, Grover Norquist and other Republican strategists have argued that massive annual tax cuts and the privatization of Social Security will not only increase the flow of capital into the marketplace, but will also put Democrats at a long-term electoral disadvantage and usher in a new era of GOP dominance. That these policies also require the government to take on trillions of dollars in extra debt, just as the first baby boomers are reaching retirement and trade imbalances are reaching historic levels, is seen by GOP leaders as a risk worth taking. And so the White House and Congress have pursued tax cutting and Social Security privatization with relentless focus, to the exclusion of almost everything else.

"What you have in Washington now is an inability to get beyond the macroeconomic, to understand that there are so many other investments government needs to be making and actions it ought to be taking, and that our future is going to hinge in large part on what decisions we make there," Michael Mandel, the influential economist and columnist for BusinessWeek, told me in January. "And right now in Washington, they're not even looking at any of that."

Burst of Energy

There is perhaps no economic sector that is undergoing a more profound evolution, or in which government investments could make a bigger difference, than energy. As India and China continue their rapid industrialization, and with it their need for oil, analysts predict that the price of oil, already sky-high, will grow even more prohibitive -- which means that whichever companies develop the most effective alternative fuels and energy-efficiency technology will revolutionize the industry, and whichever countries can produce those breakthroughs may become rich on it, the Bahrains of the 21st century.

Right now, however, the United States is not poised to be one of those countries. Demand in America for electric-gas hybrid cars already outstrips supply, but Ford is so behind the curve that it's leasing its hybrid technology from Toyota. Europe, meanwhile, is setting the pace on the next promising auto technology -- clean diesel-electric hybrids. Companies in Europe and Asia have also made more progress than have their American counterparts in developing the technology for crafting energy-efficient appliances, offices and factories -- a consequence of higher energy taxes and stricter environmental regulations in those countries.

The Bush administration's most vigorous response to all this has been to increase the funding for research into hydrogen-powered cars. Hydrogen technology is promising. But it is also decades away from the market, and even hydrogen buffs believe the administration has gone about its program the wrong way, trying to build fuel cells before figuring out the more daunting challenges of how to extract and transport hydrogen.

A better strategy, says Harvard's John Holdren, would be for the federal government to raise automobile fuel efficiency (CAFE) standards, impose a carbon cap-and-trade system for factories and power plants and let the market decide which new energy sources and technologies are the best. These ideas now have broader backing than they did a decade ago. The bipartisan National Commission on Energy Policy issued a report in December calling such measures the most critical to ensure America's energy future -- and that commission's members includes the CEOs of old-line energy giants such as Exelon and ConocoPhillips. And, Holdren told me, executives at old economy companies from Monsanto to Dow Chemical have signed on.

"Five years ago, we didn't have a shot at getting them on board," said Holdren, "but the situation is getting dire enough that now they're leading the charge." Still, many sectors, including the automobile and power industries, vehemently oppose higher CAFE standards and carbon emission limits, and the president has repeatedly rejected them.

Time to Act

Technology today is diffusing faster than ever. As the Council on Competitiveness has noted, it took 55 years for the automobile to spread to a quarter of the country, 35 years for the telephone, 22 years for the radio, 16 years for the personal computer, 13 years for the cell phone and only seven years for the Internet. Because technologies are adopted so quickly, it has become more important than ever for a country's industries to be at the cutting edge -- there's simply much less catch-up time.

But what worries economists even more than the past four years of economic drift is the prospect of continued inaction. The speed of technological change is now too fast, and the economic competition too fierce, for America to afford that. There is no law that says the United States will be the world's preeminent economic power forever. But neither is there any reason we can't rise to the challenge, as we did in the 1980s and 1990s. Then, as now, becoming more innovative is the solution to our problem. But first, we must recognize that we have a problem.

Benjamin Wallace-Wells is an editor of The Washington Monthly, where a version of this analysis first appeared. To read the full version, go to

Publication date: 04/07/05

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