The Real Solution Is Growth

By Daron Acemoglu

Posted on August 18, 2011


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Recent headlines have focused on the debt ceiling, the recent credit rating downgrade, unemployment, and the other thorny fiscal challenges facing the United States. But consider this: increasing the country's average growth rate by one percentage point over the next 20 years would not only result in much higher incomes and more jobs for all Americans but would also obviate the need for drastic spending cuts today to reign in the government deficit. With a 2% increase per year, average incomes in the United States, and to a first approximation government tax revenues, would be 49% higher in 20 years than they are today; with a 3% increase per year, they would be 81% higher.
 

The underlying message? We should not take our eye off the really important ball: economic growth and the innovation process that underpins it.


Though the U.S. economy has tremendous innovative capacity, even in the depths of the current recession, this means neither that policies to encourage high-value innovation are not possible nor that we should ignore the danger of significantly damaging this capacity.


Here are the dangers.
 

  • Patent protection is becoming a more bureaucratic, red-tape-ridden, and uncertain process. A significant part of innovation and almost all of commercialization is driven by profit incentives and relies on a system of protection for the intellectual property rights of innovators and entrepreneurs. Patenting is the bulwark of the system. Patent thickets that companies must navigate, at their peril, and patent trolls awaiting litigation opportunities are making intellectual property hazardous. The ongoing plethora of smartphone cases is just the tip of the iceberg. The patent bill that has recently cleared the House and the Senate fails to tackle most of these issues. Increasing litigiousness in matters of intellectual property is a significant threat to the innovative dynamism of the U.S. economy. We need to guard against it.


  • The explosion of salaries on Wall Street has attracted many of the talented individuals who otherwise would have gone into research, design, and engineering occupations. This flight of talented students to work in finance harms all of us because it means that we have fewer "positive spillovers" from innovative activities. The beneficiaries from Apple's innovation were not just its shareholders and iPhone users the world over, but also its competitors that are now building smartphones inspired by the iPhone, as well as the millions of consumers who now use Android-based phones. These spillovers from innovation imply that society gains when its best and brightest go into innovative sectors. This is what the U.S. economy has been able to achieve for decades but should not take for granted anymore. Allocating our best talents to finance risks damaging the long-term innovative capacity of our economy.


  • Markets will not generate enough innovation. This is one of the main justifications for government subsidies to research and higher education. And during this politically challenging period of cost-cutting and spending caps, politicians may find it tempting to cut funding to innovative activities. Science funding, for instance, is becoming more politicized. The long-term damage resulting from dismantling the premier higher education and research infrastructure of the United States would be dire.


  • Innovation also relies on the political infrastructure of society. A stable society with secure property rights and social mobility is essential for generating incentives for innovation and for enabling those with the ability and ambition to reach their full potential. A dysfunctional political system threatens innovation and economic growth. U.S. political institutions have shown great dexterity and flexibility over the last two centuries in withstanding challenges from politicians and robber barons alike. But a downward spiral in these institutions looks possible perhaps for the first time in the last seven decades, and our best weapon against this is political participation by a broad segment of society.


And here are some positive measures for fostering innovation.

 

  • Encourage skilled foreign workers to work and settle in the United States. U.S. innovation relies on the skills and ingenuity of the best and brightest around the world. Despite concerns about brain drain in developing economies, research by Harvard Business School's William Kerr shows that everybody is the winner when the United States attracts talent from abroad. Applications for H1B visas far outstrip the available quotas, and our companies and consumers can greatly benefit from permitting more skilled workers to come to the United States. But the political trends are in the opposite direction. The stimulus package made it harder for many companies to hire foreign workers, and some lawmakers would even go further and restrict H1Bs. Despite extremely high unemployment numbers, our economy and innovative capacity would benefit from a much more liberal policy towards skilled immigration.


  • Foster the commercialization of innovation. Much more can be done to facilitate this process. The Bayh-Dole Act of 1980 was only a small step toward encouraging commercialization of academic research. Even as the U.S. government is trying to cut spending, commercialization of new research would be one area deserving of new funding, particularly to ensure that this process does not undermine the greatest virtue of academic research, its openness.


  • Focus on green technology, the next area that has the best promise of creating a platform for more innovation. Innovations in information and communication technology starting in the 1960s have had a transformative impact on the world economy by creating a platform upon which myriad other technologies and products could be developed. Green technology has the potential to cut carbon emissions, sure, but we also need to transform the way in which energy is delivered, utilized, and monitored. This necessitates innovation and significant investment not only in power generation but also in the electricity grid, in the transport system, and in homes and factories. The United States is lagging behind other countries in these activities. To regain leadership, we need both more and smarter subsidies to research in green technologies and a carbon tax that naturally encourages the use of cleaner technologies and triggers more research to seek such technologies.


All of this is easier to say than it is to do, but that's no reason not to use these principles to help us climb out of our current hole.

***


Daron Acemoglu is currently the Charles P. Kindleberger Professor of Applied Economics at Massachusetts Institute of Technology and winner of the 2005 John Bates Clark Medal. His principal interests are political economy, economic development, economic growth, technology, income and wage inequality, human capital and training, and labour economics. His most recent works concentrate on the role of institutions in economic development and political economy.


The Real Solution Is Growth” is re-published with permission from Professor Acemoglu and the Harvard Business Review. It was originally published August 8, 2011.
 


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About the Author

  • Daron Acemoglu
  • Massachusetts Institute of Technology
  • 50 Memorial Dr., E52-380b
    Cambridge, MA 02142-1347


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