Good Speech, Good Ideas, Yet More Needed…

Stephen Ezell, Matt Stepp, and Rob Atkinson contributed to this summary.

The President mentioned many issues ITIF focuses on in his State of the Union address last night. And by in large, we agree with what he said when it comes to economic competitiveness. The President deserves praise for putting these issues, specifically manufacturing, front and center. He helped rally the nation and the Congress to the fact that restoration of competitiveness and a vibrant manufacturing sector are, indeed, the pillars on which rests our economic future. However, in some cases, we wish he had gone just a little further, maybe clarifying, maybe being a little bolder. Here are a few examples:

• Funding R&D: “Innovation is what America has always been about,” he said. Absolutely. We laud him for prodding Congress to maintain basic research funding budgets. However, the President should have included applied research in his prod. To understand why, look at Germany. Its manufacturing sector accounts for 20% of the country’s GDP as opposed to the United States 11% and German manufacturing workers earn 40% more in hourly wage compensation than U.S. manufacturing workers. Its exports of research-intensive high-tech products are seven times greater than the United States’ as a share of GDP. One reason is that the country spends six times as much on industrial research and production technologies as does the United States. Through its network of Fraunhofer Institutes (supported one-third by Germany’s federal and state governments and two-third by industry), Germany invests heavily in collaborative, pre-competitive applied (or “translational”) research into key emerging technologies or sectors (such as robotics, nanotechnology, or photonics). In other words, they make sure basic research gets turned into commercial products by supporting applied research.

• Manufacturing: Kudos as well for the President’s stress on manufacturing. However, we wished he had announced a manufacturing technology initiative that would invest $500 million in public-private partnerships supporting advanced manufacturing and technology development in the United States, as the June 2011 PCAST Report to the President on Ensuring American Leadership in Advanced Manufacturing advocated. While it’s all well and good to tell stories of manufacturers returning to the United States from abroad—and no doubt smart and effective policies can and should abet that process—the United States needs to make serious investments in advanced manufacturing to both match those of our competitors and to ensure that U.S. remains competitive in the advanced high-tech manufacturing sectors of the future.

• Trade: The President’s announcement of a Trade Enforcement Unit (TEU) is a step in the right direction. ITIF has long advocated giving more resources to USTR for enforcement and making it a high priority. The President was spot on in saying that “It’s not right when another country lets our movie, music, and software be pirated. It’s not fair when foreign manufacturers have a leg up on ours only because they’re heavily subsidized.” But let’s not kid ourselves. Enforcement is only part of the challenge. The President needs to call out China as a currency manipulator and to insist at the highest levels that the country immediately begin to adhere in full to its WTO commitments (including participating in side agreements such as the Government Procurement Agreement). Perhaps the Administration’s best option would be to pursue the creation of a new multilateral trade agreement, a Trans-Atlantic Partnership, whose members would enter into a gold-standard trade agreement that seeks the highest levels of open market access, elimination of both tariff and non-tariff barriers, and protection of intellectual property rights.

Taxes: The President was absolutely correct to observe that “companies who choose to stay in America get hit with one of the highest tax rates in the world” (second only to those in Japan, in fact). But so do U.S. multinational companies. We agree that U.S. corporate tax reform is sorely needed but we remain wary of simplification for simplification’s sake. We need stronger, not weaker, incentivizes for investing in the building blocks of competitiveness: R&D, workforce training, and capital equipment and machinery. The President got applause when he said, “Second, no American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas. From now on, every multinational company should have to pay a basic minimum tax. And every penny should go towards lowering taxes for companies that choose to stay here and hire here.” Well, that sounds good but it ignores the fact that this proposal will raise taxes on some companies, especially companies that are in traded industries facing the most robust international competition. The President needs to stop trying to get “pay fors” by ending deferral, and rather recognize that any reform cannot be revenue neutral. We need lower effective corporate tax rates. It’s much better to get multinational companies to want to be here because we have low and globally competitive corporate income tax rates rather than having to threaten them with paying a basic minimum tax.

• Technology and Jobs: We were disappointed when the President said, “Technology made businesses more efficient, but also made some jobs obsolete.” The problem with this is that it stokes distrust of technology at a time when we can really use it. The data is unambiguous that higher rates of productivity lead to more jobs in the medium to long term, not fewer jobs. In addition, with the declining worker to population ratio as baby boomers age over the next 25 years, we need to ensure that either their after-tax incomes don’t go down or retirees expected incomes don’t go down. Boosting productivity is the single best way to do this is and we need technology for that. As NIST Senior Economist Greg Tassey has said, “If you don’t invest in productivity, you lose all your jobs.”

• Energy: The President made a strong case to “double-down” on federal support for clean energy. He pointed out the important, yet often under-reported role of the government in supporting breakthrough energy technologies such as those used to extract natural gas from shale. It’s an important story that mirrors the story of most clean energy technologies today. But the devil is in the details. First, we laud the President for wanting to spur more “energy innovation,” but he largely ignored implementing an aggressive clean energy R&D agenda. Supporting new ideas and earlier stage technologies is absolutely vital because we need cheaper, better technologies than what we have today. Second, because of budget austerity and stimulus funds drying up, many key public investments in R&D are disappearing and new revenue streams are needed. We’d like him to consider an idea ITIF has supported and argue for diverting tax revenue from the expansion of oil and gas drilling or the elimination of fossil fuel subsidies to fund clean energy R&D. Third, the President called for additional support for late-stage clean energy deployment tax incentives and a clean energy standard. While both would provide additional support for the clean economy and could potentially play key roles in an energy innovation strategy, as they’re conceived today both policies would only deploy less competitive, existing technologies and fail to spur greater innovation. A good hard look at reforming those policies to drive increasing performance improvements and cost declines is a must. Last, the President was correct to mention the vital role DOD is playing in spurring energy innovation, as it represents a robust energy innovation ecosystem that could have significant spill-over benefits. Let’s hope his budget reflects that belief when it comes out in three weeks.