U.S. Innovation Threatened

Interesting survey came out about economic competitiveness. Actually, maybe interesting is an overstatement, reinforcing is probably a better word.

Asked about the economic future of the U.S. over the next decade, only 13 percent of the 3,000 survey respondents agreed with the statement that the U.S. “will remain the most innovative country and therefore the global economic leader.”

[From Survey: US residents unsure of future of innovation | The Industry Standard]

Fundamentally nothing has changed in the U.S. that negatively impacts competitiveness, except for the economic recession, but a number of issues have been left unaddressed over the years and the result has been an erosion of competitiveness.

Immigration is a big nasty issue and what the tech industry cares about, H-1B numbers, is actually a really small part of the overarching issue. In a perfect world it should be a relatively straightforward solution to increase/decrease the number of new visas issued year over year, but of course we know it is not a simple solution. There is simply no way that the H-1B (actually there are several visa types that should be dealt with) issue gets addressed independent of the broader illegal immigration issue so I think we will end up living with the status quo.

The larger and more complex issue impeding competitiveness is the patent and copyright systems, both of which are dreadfully out of step with technology innovation and seemingly ill-equipped to deal any expansion of technology innovation. More significantly, the drag that the legal processes impose on new business creation are onerous to say the least, diverting capital away from invention and creation. There is momentum building to reform patent, trademark, and copyright law but given the scope and powerful interest groups surrounding all sides, it’s hard to speculate on what might actually be done to reform this system.

I am not a big believer in government sponsored investment in innovation because the money used for these programs must be borrowed or taxed out of the economy, which puts drag on the overall economy, but more importantly there is a well documented track record of inefficiency and political patronage in government programs that perverts the originating purpose for the spending in the first place.

Pundits like to point to the internet as an example of a success story for government sponsored innovation but it’s important to realize that the internet was originally built by the military, which operates much differently from the rest of government and secondly that the impact of the internet on modern life is a consequence of a massive amount of infrastructure spending done by the private sector with investor capital, not the government. Commercialization of the internet is responsible for its success, which is anathema to those who promote a larger government role in private sector investment.

Tax policy, federal and state, remains the single largest issue affecting investment and innovation. The federal R&D tax credit has a worthy goal but in practice is such a complex process that only the largest companies can take advantage of it. Capital gains taxes remain too high and fail to recognize the myriad ways that capital can be deployed. For example, there is no differentiation between long term cap gains as a consequence of real estate investment versus venture capital, the former arbitrages an existing asset while the latter actually benefits innovation. Germany’s capital gains tax system is a much more reasonable approach to taxing investment gains.

The U.S. is unlike practically every other country in that it taxes citizens on income irrespective of where that income is generated. There are arguments on either side of this issue that are valid; my preferred approach would be to couple offshore income generation with low capital gains taxes to encourage wealth created offshore to be reinvested within the U.S., and right now we have a system that has the exact opposite effect.

Lastly, K-12 education is often pointed to as a key competitiveness enabler, and it would be hard to dispute the role that education plays in modern society and wealth creation, yet this understates the role that parents and external forces have in education. It is impossible to force students into a math and science education tract, at least not without adopting a planned approach to economic development, something that simply will not happen in free societies. Despite the inadequacies of our K-12 education system, the U.S. consistently turns out generations of young people that engage in business creation, research, and innovation.

The forces involved in K-12 education will frustrate every attempt to reform the system, it will only happen when a majority of voters engage the issue and force reform but that require a massive leap of faith that voters will actually take the time to consider more than 30 seconds of sound bite. If it were me I would like to see the school year extended, restructure the system to graduate students after 10th grade and move them to a pre-collegiate track or vocational school for 2 years, and lastly, revamp the curriculum to reflect critical thinking as well as core subjects, but I admit that I am also vastly simplifying a complex problem.

In summary, while U.S. competitiveness has declined relative to other countries, little will be done to improve the core issues so it will be left to the private sector and families to carry the burden. It may also be misleading to suggest that factors in the U.S. alone are responsible for this shift, given that other countries have developed over the last 30 years and closed the gap with the U.S., making the issue less about the U.S. losing leadership and more about a global economy improving the conditions by which all of the mankind develops. At any rate, surveys like this tend to not be very informative, instead they serve primarily to reinforce whatever bias a particular interest group holds.