A Response to Dean Baker’s Review of Innovation Economics

A response to Dean Baker’s Huffington Post review of  Innovation Economics

Dean Baker suggests that the causes of the so-called Great Recession—itself precipitated by the mortgage bust and subsequent housing decline—are cut and dried. He traces these to beginning with the “anti-worker policies of the 80s” and continuing through Greenspan’s insistence to keep interest rates low throughout the 2000s, which contributed to the inflating of an asset bubble (housing) that subsequently burst. Today, Baker’s prescription is to throw trillions more of stimulus at the economy (because the initial almost $1 trillion wasn’t enough) to get the economic ship of state straightened.

In essence, what Baker, reflecting the classical Keynesian perspective, proposes is a massive adrenaline shot to the heart to get the economy pumping again. But the point ITIF’s book, Innovation Economics: The Race for Global Advantage, makes is that the constant resort to shots to the heart—whether Greenspan’s low rates or Baker’s stimulus (which are really just different sides of the same coin, artificially pumping up the economy)—miss the underlying problem and solution: the need to strengthen the heart muscle; that is, the competitiveness, innovation, and productivity capacity of the U.S. economy. For fundamentally, it was our economy’s competitive weaknesses here—reflected in a range of factors such as an uncompetitive tax code (2^nd highest corporate tax rate in the OECD; an unstable and increasingly less generous R&D tax credit system); faltering STEM and K-12 education system; a wildly counterproductive immigration policy; a poor patent policy (three-year backlog of 750,000 patents); etc.—that led enterprises, especially those in traded sectors, to increasingly view the United States as a less desirable location for R&D and production activity and increasingly shift such activities abroad. This was exacerbated by our inability to effectively defend our trade interests in global markets (e.g., to counter foreign innovation mercantilists manipulating their currencies and stealing our IP) and to ourselves quickly enough bring forward key new sectors such as biotechnology (again, in part, a result of poor policies), clean energy, etc.

In other words, Baker doesn’t engage what’s actually our key point: that it was the failure of the U.S. innovation economy that was the underlying cause of the economic crisis and now our continuing anemic recovery. Throwing trillions more of stimulus at it won’t solve the problem (though it may kick it to the next generation, as appears to be the wont of policymakers in Washington these days).  Rather, we need to get serious about addressing the underlying competitiveness challenges we face through smart policies including what ITIF calls the “4Ts” of tax, trade, technology, and talent.

And while Baker laments not enough recommendations on patent reform in the book, Innovation Economics includes a number of novel recommendations ranging from introducing patent boxes to collaborative R&D tax credits to reforms to the national laboratory system to speed bringing science to market. At the same time, it’s not all about shiny policies. Restoring our innovation competitiveness will require us to do a lot of seemingly dull “blocking and tackling things”—like graduating more highly trained scientists and engineers, like increasing federal investment in R&D (which has steadily decreased as a share of GDP since the 1960s), like fixing our immigration system to welcome the world’s most talented. But the point is that we’ve got to do these things—and we haven’t. Baker actually seems to agree with many of these points and that the United States needs a more sophisticated innovation policy; it’s a shame he hasn’t elected to use this opportunity to enroll his voice in amplifying the book’s call for the country have a more serious dialogue about bolstering the innovation-based competitiveness of its economy.