Restoring Investment in America’s Economy

Robert D. Atkinson June 13, 2016
June 13, 2016
We are seeing continued progress in technological innovation, yet anemic productivity growth. A big reason is that public and private investment have fallen in the last decade. It’s time for serious pro-investment policies.

The Information Technology and Innovation Foundation (ITIF) was founded in 2006. Looking back on the intervening decade, we have seen, in essence, a “tale of two cities”—dramatic progress in scientific and technological innovation, yet anemic productivity growth. This represents one of the most important challenges that policymakers must address in the years ahead, because productivity is a sine qua non for improving people’s living standards. How can we jumpstart productivity? Part of the answer is by spurring public and private investment in the underpinnings of the modern economy. ITIF will mark its 10-year anniversary with a half-day conference on June 14, 2016 devoted to this critical issue. The purpose of this report is to help frame the discussion.

Rapidly Evolving Technology, Sputtering Productivity

Ten years ago, there were a billion Internet users globally; today, there are 3.2 billion. Ten years ago, 30 percent of Americans subscribed to broadband Internet service in their homes at an average speed of 1.5 megabits per second; today, more than 82 percent subscribe to broadband at an average speed of 14.2 megabits. The first 3G wireless services were launched around five years ago with speeds of about 500 kilobytes per second. Data traffic was so low it wasn’t even measured. There were no app stores. Today, the United States leads in 4G LTE use, with speeds averaging 3 megabits per second or faster, while roughly 6 exabytes of traffic travel over the U.S. wireless networks annually. Meanwhile, someone has downloaded the 100 billionth app from Apple.

One reason for all this progress is that computing power has continued to improve, albeit at a somewhat slower rate than in the 1980s and 1990s. The fastest supercomputer in 2006 could perform calculations at a rate of 0.4 petaflops per second. (A petaflop is one thousand trillion floating point operations.) Today, the fastest is 54.9 petaflops, almost 140 times faster. (Unfortunately for U.S. competitiveness, that computer is in China.) In 2006, ten gigabytes of data storage cost $6. Today it’s less than $0.03. That’s why our laptops can store hours of HD video—and why cloud computing has exploded.

Ten years ago, there was little experience with, much less talk of autonomous vehicles, 3D printing, drones, blockchains, deep-learning computing systems, big-data analytics, or the Internet of Things (IOT). Today these technologies are either on the market or in beta testing.

Information technology is not the only area of improvement; we also see progress in other technologies. For example, if you wanted to get your genome sequenced in 2006, it would have cost you $12.5 million. Today, you can have it done for $1,245.

But while technology continues to improve, become more affordable, and make our lives better, we haven’t been seeing the impact we would have expected in the economy. Since 2008, U.S. productivity growth sagged to just 1.2 percent per year, its lowest level since the government began reporting productivity statistics after World War II. Clearly, to quote economist Robert Solow, we are once again seeing technology “everywhere but in the productivity statistics.” This has profound implications. As Vice Chairman of the Federal Reserve Bank Stanley Fischer states, “There are few economic issues more important to our economy and others than productivity growth.”

So why have we not seen the strong productivity growth we need? As explained in the recent ITIF e-book Think Like an Enterprise: Why Nations Need Comprehensive Productivity Strategies, there is solid research suggesting that the slowdown is not a cyclical phenomenon, nor is it because we are measuring output incorrectly. Rather, a key factor appears to be the slow growth of, or in some cases, an outright decline in both private and public investment. Indeed, there is a strong consensus among economists about the importance of investment to productivity. But the trends in the United States are troubling, to say the least.

This report summarizes recent declines in both private and public investment. For example:

  • Net private investment in equipment and software averaged around 2.0 percent of GDP in the 1990s, but it fell to less than 1.2 in the 2000s and then slid further to 1.1 percent in the 2010s.
  • The “tools” available to the average U.S. worker are worth significantly less today than they were 15 years ago. In fact, the stock of equipment assets per worker declined from average value of $42,000 in 1995 to around $32,000 in 2014 (in constant 2009 dollars).
  • Business investment in risky, long-term basic and applied research has fallen from around 30 percent of total business R&D in the 1990s to approximately 26 percent today.
  • Federal investment in transportation and water infrastructure capital has fallen from $96 billion in 2002 to $69 billion in 2014 (in constant 2014 dollars), an astounding 29 percent.
  • Federal funding for employment and training has fallen by about half as a share of GDP from the mid-1980s to present.

After detailing investment trends, report examines the causes for the declines and then outlines six steps to restore public and private investment in the underpinnings of a dynamic, innovation-oriented U.S. economy:

  1. We need to develop a broadly shared political consensus that society has a stake in the investment decisions of industry.
  2. Just as we need a new consensus in support of private-sector investment, we need a new consensus supporting increased public-sector investment.
  3. We need targeted tax policies to spur investment.
  4. Any national investment policy needs to include measures to counter corporate short-termism.
  5. Spurring technological innovation in capital goods will play an important role in increasing private-sector investment.