Overview

The Case for Action

A National Advanced-Industry Strategy

Five Reasons Policymakers Fail to Recognize They Should Do Anything to Address Innovation and Competitiveness

Four Ways Pundits and Policymakers Misunderstand What Should Government Do

Conclusion

Endnotes

Overview

The United States is the only developed nation without a comprehensive strategy to improve the competitiveness of its advanced industries. Both a hyper-partisan political environment and stakeholder resistance play some role in explaining this anomaly, but the main culprit is conventional wisdom. Few policymakers and even fewer pundits or economic analysts understand U.S. competitiveness problems in a way that would lead them to the logical conclusion that such a policy would count as a viable solution.

To be sure, this deficit of the mind—tied up in a morass of Washington “group think”—has gotten decidedly better in the last few years as it has become clearer to many on both sides of the aisle that the United States needs to act, if only to counter the growing hegemony and technology leadership of China. But economic policy is as slow and difficult to turn as an ocean tanker—and the first step in the painstaking work of building support for policies to boost U.S. advanced industry competitiveness is entirely reprogramming the logic chain that has been holding Washington on the same course for so long.

Few policymakers and even fewer pundits or economic analysts understand U.S. competitiveness problems in a way that would lead them to the logical conclusion that a national innovation and competitiveness strategy would count as a viable solution.

The Case for Action

Before describing the chain of logic that points directly to the need for an advanced-industry strategy, it’s important to lay out the case for some sort of action. In short: Over the last two decades, the U.S. economy has lost its competitiveness edge.

Perhaps the most obvious sign of U.S. economic decline has been the erosion of the country’s Manufacturing base. From 2001 to 2010, the United States lost 42,400 factories (three-quarters of which employed at least 500 workers while in operation), 32 percent of its manufacturing jobs, and much of its technical edge.[1]

Since then there has been further erosion. From 2007 to 2019, while GDP grew by 22 percent, real manufacturing value-added grew by just 5.6 percent. As a result, manufacturing’s share of gross domestic product (GDP) fell from 13.2 percent to 11.4 percent. This also obscures significant differences within industry sectors. All of the eight nondurable goods sectors (such as paper, chemicals, and plastics) produced less in absolute terms in 2019 than they did in 2007. Moreover, as a number of analysts—including the Information Technology and Innovation Foundation (ITIF)—have shown, the Bureau of Economic Analysis (BEA) significantly overstated the output growth of the computer sector (NIACS 334) because it assumes that when a computer doubles in speed due to Moore’s Law, actual output also doubles. Leaving out the production of computers—most of which has moved overseas—U.S. manufacturing output actually declined by 3 percent.

Just as troubling is that U.S. manufacturing is in a productivity slump. In 15 out of 18 years from 1990 to 2007, Manufacturing Productivity Grew faster than overall non-farm business productivity, often by more than twice as much. But between 2008 and 2019, manufacturing productivity grew faster in just 3 of the 12 years. In 2019, while business productivity grew 1.9 percent, manufacturing productivity grew just 0.1 percent. One reason for this might be U.S. manufacturers increased capital expenditures by just 17 percent between 2008 and 2017 (the latest year for which data is available), or one-third the rate of the information sector (e.g., Internet, communications, etc.). Without robust productivity growth, manufacturing gets less competitive globally, which is why it grows more slowly than GDP.

One would think, with manufacturing productivity growing more slowly than the rest of the economy, job growth would be robust (and as other sectors become relatively more efficient). But at the end of 2019, manufacturing employment was still 6.5 percent below its pre-recession levels.

Many once-iconic U.S. advanced-industry firms have lost significant global market share or even gone out of business.

But even if America is losing manufacturing, surely it is still leading in innovation, right? So goes the thinking (as if manufacturing is not innovative). But on many measures, when controlling for the size of the economy—such as government and business research and development (R&D) expenditures and patenting—the United States is no longer the leader. It ranks 12th in patent cooperation treaty patents filed as share of GDP, 23rd in researchers per capita, 27th in high-tech exports as share of trade, and 44th in scientific and technical articles as a share of GDP.[2] Moreover, in 2019, the United States ran an all-time-high trade deficit of $132 billion in advanced technology products, down from a $4.5 billion trade surplus in 2001.[3] With China, the trade deficit in electronic products was $184 billion in 2017, as U.S. exports totaled just $21 billion.^[4]

Also, many once-iconic U.S. advanced-industry firms have lost significant global market share or even gone out of business. Forbes issues a list of the top 2,000 firms each year. To be sure, from 2006 to 2019, a number of U.S. technology firms increased their global ranks significantly, particularly in software (e.g., Microsoft); semiconductors (e.g., Intel, Micron, and Nvidia); and Internet services (e.g., Facebook). But many hardware and related firms either lost ground or went out of business. Once-global leaders such as Lucent, Motorola, and Nortel (a Canadian firm that at one time employed thousands of U.S. workers) are now defunct. And leaders such as IBM, Hewlett Packard, Agilent (formerly part of HP), and General Electric all fell significantly. (See table 1.)

This decline has two underlying causes. The first is domestic: a failure to keep up with other nations on putting in place the best policies to spur manufacturing and innovation, including a competitive R&D tax incentive, education and training policies, support for infrastructure, and science and technology policies. The second is foreign countries are competing more fiercely (and often unfairly) to attract and grow traded industries. The most important competitor is China, which in 2006 pivoted to a goal of dominating most advanced technology industries, later doubling down with its Made in China 2025 plan.

Table 1: Select U.S. technology firm rankings on the “Forbes 2000” list (*unranked or no longer in business)[5]