New York Times‘ columnist Bob Herbert claims “the biggest issue confronting ordinary Americans right now — the biggest by far — is the devastatingly weak employment environment. Politicians talk about it, but aggressive job-creation efforts are not part of the policy mix. Nearly 15 million Americans are unemployed, according to official statistics. The real numbers are far worse. The unemployment rate for black Americans is a back-breaking 15.1 percent. Five million people have been unemployed for more than six months, and the consensus is that even when the recession ends, the employment landscape will remain dismal. A full recovery in employment will take years. With jobless recoveries becoming the norm, there is a real question as to whether the U.S. economy is capable of providing sufficient employment for all who want and need to work. This is an overwhelming crisis that is not being met with anything like the urgency required” [“It’s Time to Get Help,” 8 September 2009]. Adrian Slywotzky, writing for BusinessWeek, asserts that we are looking in the wrong direction for help. He insists we need to stop looking at politicians and business leaders for help and start looking to scientists instead [“How Science Can Create Millions of New Jobs,” 7 September 2009 print issue]. He writes:
“Name an industry that can produce 1 million new, high-paying jobs over the next three years. You can’t, because there isn’t one. And that’s the problem. America needs good jobs, soon. We need 6.7 million just to replace losses from the current recession, then an additional 10 million to keep up with population growth and to spark demand over the next decade. In the 1990s the U.S. economy created a net 22 million jobs, or 2.2 million a year. But from 2000 to the end of 2007, the rate plunged to 900,000 a year. The pipeline is dry because the U.S. business model is broken. Our growth engine has run out of a key fuel—basic research.”
I have written before about the importance of research of development in ensuring that economies remain strong. I have also noted that Asia is outspending the U.S. in that area. It comes as no surprise, therefore, that Asia is recovering faster than the U.S. [“An astonishing rebound,” The Economist, 15 August 2009]. The article reports that “the four emerging Asian economies which have reported GDP figures for the second quarter (China, Indonesia, South Korea and Singapore) grew by an average annualised rate of more than 10%. Even richer and more sluggish Japan, which cannot match that figure, seems to be recovering faster than its Western peers. But emerging Asia should grow by more than 5% this year—at a time when the old G7 could contract by 3.5%.” Of course, there are reasons beyond the fact that Asia spends more on R&D, but R&D are contributing factors. Returning to Slywotzky’s article, he continues:
“The U.S. infrastructure for scientific innovation has historically consisted of a loose public-private partnership. It included legendary institutions such as Bell Labs, RCA Labs, Xerox PARC, and the research operations of IBM, along with NASA, the Defense Advanced Research Projects Agency (DARPA), and others. In each of these organizations, programs with clear commercial potential were supported alongside pure research. There was ample corporate and venture capital funding for commercialization, so the labs were able to make enormous contributions to science, technology, and the economy—including the creation of millions of high-paying jobs.”
Slywotzky lists a few of the many innovations that came out of these institutions: “Fax transmission, long-distance television transmission, photovoltaic solar cells, the transistor, the UNIX operating system, and cellular telephony.” More importantly, “each of these innovations laid the groundwork for vibrant new industries.” Based on such historical examples, Slywotzky can’t understand how the U.S. allowed it infrastructure for scientific innovation to crumble. He laments:
“Since the 1990s, funding for basic research has slowly declined. Bell Labs had 30,000 employees as recently as 2001; today (under current owner Alcatel-Lucent) it has 1,000. That’s symbolic and symptomatic of the broken link in the U.S. business model. With upstream invention and discovery drying up, innovations capable of generating an industry have thinned to a trickle. … In the past, when the U.S. exported high-paying jobs to low-wage countries, we replaced them with even greater numbers of high-paying jobs in industries whose inception could be traced back to science done decades earlier. The PC, Internet, and cellular industries, born in the 1980s and 1990s, more than offset the loss of high-paying jobs in consumer electronics, steel, and other sectors. But in recent years, outsourced software and manufacturing jobs have largely been replaced by millions of low-wage service jobs in fast-food, retail, and the like. Compounding the effects of outsourcing and extended recession, the ongoing destruction of old business models (think print journalism, the music business, and landline telephones) will slash a large number of high-value jobs in the coming decade. The result? A broken demand structure. Of the roughly 130 million jobs in the U.S., only 20%, or 26 million, pay more than $60,000 a year. The other 80% pay an average of $33,000. That ratio is not a good foundation for a strong middle class and a prosperous society. It’s time to identify—and fix—the root of the problem.”
In my discussions about development, I have repeatedly stressed the importance of a strong middle class in promoting sustainable economic growth. Slywotzky is correct in being concerned about the slippery slope on which America’s labor pool is perched. Too many people are blaming free trade agreements and globalization for America’s ills and too few people are thinking like Slywotzky. Slywotzky is not a Cassandra forecasting America’s downfall. In fact, he is trying to awaken America to a path he believes will help it maintain a strong economy and influential position in the world. He continues:
“The good news is that restarting the science engine is quite doable and doesn’t require massive investment relative to other spending. Venture capitalists are sitting on plenty of cash and are good at bringing startups to the market. We just have to rebuild the upstream labs that focus on basic research—the headwaters for the whole innovation ecosystem.”
Slywotzky’s approach requires one thing that the American public has shown little of — patience. The science engine doesn’t immediately crank out commercial products that provide the foundation of new industries. It takes time to do the basic science, see commercial potential, and develop new products (Slywotzky claims that “the timeline for translating scientific research efforts into tangible results is typically 15 years or longer”). I suspect that America’s penchant for wanting instant gratification is one reason that the science engine was starved for funds in the first place. As Slywotzky puts it — “science is a crapshoot.”
“It depends on the efforts of hundreds of people with high IQs, PhDs, deep curiosity, and a strong work ethic—not to mention serendipity. It also takes a certain critical mass, not just in people, but also in infrastructure, which means lab support, equipment, and instrumentation. It takes open communication among peers and other subtle but critical cultural factors. Success requires a tolerance for risk—and failure; a willingness to think and apply innovation laterally (many of the big breakthroughs were originally aimed at other targets); and a culture that attracts and rewards the best minds.”
Slywotzky traces the demise of basic research funded by large corporate laboratories to the 1990s when there was an “increasing focus on shareholder value” that meant “top companies could no longer justify open-ended research that might not have a near-term impact on their bottom lines.” The results, he writes, should have been expected.
“For any institution, cutting back on basic research may make great sense in the short term. For a time you can free-ride off the investments of others. But then you have the ‘tragedy of the commons’ writ large. What’s good for the company (‘cut the science’) is a disaster for the system—no new industries.”
Slywotzky believes that there are plenty of challenges currently being faced by Washington that could benefit from the kind of focused attention given to the Manhattan Project and the Apollo moon landing project. In both cases, he notes, the timeline for translating scientific research efforts into tangible results was shortened considerably. Such challenges include energy, health care, transportation, water supply, and climate change. Slywotzky believes that people will continue to ask where the jobs are from the stimulus package as long as no new industries are being created. He, therefore, recommends that Washington “unleash a series of focused projects, supported by research investments in a dozen or more leading companies.”
Only such direction and support could reproduce, on some scale, the cumulative impact of Bell Labs, RCA Labs, Xerox PARC, and the rest. In essence, the U.S. must recreate a broad network of industrial and national labs, perhaps catalyzing the process with one or two major national initiatives.”
He admits this won’t be easy (or cheap), but the benefits of such a strategy, he argues, will far aweigh the risks.
“Funding is always an issue, but consider that Bell Labs’ budget peaked at $1.6 billion in 1982—about $3.6 billion in 2009 dollars. Today, $20 billion a year could fund three large labs and five smaller ones. Split between public and private sources, $20 billion is not so much. If leading companies committed a small percentage of their R&D budgets to pure research in exchange for a tax credit or a government match, a new innovation ecosystem would quickly begin to take shape. It would also be much easier to attract top minds today than during the dot-com boom of the 1990s or the financial innovation boom of this decade. The choice facing the country is to do nothing and risk the decline of innovation or act boldly by reasserting our faith in scientific inquiry and discovery. We can’t do this as a series of half steps that are expensive but ineffectual, that don’t reach critical mass or a critical rate of change. This middle-road approach might well describe NASA over the past 30 years—not necessarily a good model.”
In this case, Slywotzky claims, we need to look to the past to the “better model … we have put aside: a dynamic public-private ecosystem of large-scale labs and a venture capital industry waiting downstream to commercialize ideas and turn them into large public companies that create lucrative and satisfying jobs.” He concludes his article by detailing the strategy he believes America should follow to achieve this model:
“First, clear national goals in two or three key areas, such as carbon-free energy and preventive medicine. Second, a commitment of $10 billion a year, above and beyond spending for national agencies, to jump-start new industrial research labs. Third, government tax credits for corporations that promise to spend, say, 5% to 10% of R&D on basic research.”
Slywotzky says today’s situation is analogous to that found in America following the Second World War. America’s best minds had been put to work trying to produce materials that could win the war at the expense of basic research. The country was able to turn around because it was able to redirect its efforts following the war. As a result, America became the anchor of the global economy. China, which hopes to become the anchor of the global economy, has also committed itself to research and innovation. If America hopes to keep up, it needs to follow a strategy similar to that recommended by Slywotzky.