July 19, 2010 – Page 1730

It isn’t often that a major corporation relocates a factory and its hundreds of jobs from China to the United States. But tacking against the prevailing trade winds, that’s exactly what General Electric Co. decided to do last year, moving production of a new generation of water heaters to the company’s Appliance Park in Louisville. And that’s what brought Vice President Joseph R. Biden Jr. to Kentucky three weeks ago.

Biden went there to tout the critical role the federal government played in GE’s decision, in the form of $25 million in tax credits provided through the “advanced energy manufacturing” program enacted in the 2009 economic stimulus law. It’s a central element of the Obama administration’s strategy to promote innovation in U.S. manufacturing and clean-energy development, and to elevate American exports at a time when China and Germany — not the United States — are leading the way out of the global recession.

Just like President Obama’s Michigan photo-op last week highlighting federal aid to U.S. companies that are developing advanced battery technology and electric cars, GE’s relocation to Kentucky offers a perfect advertisement for the administration’s ideas. Its new water heaters incorporate “smart grid” technology that allows them to communicate with utilities and cut electricity use during peak periods. The Kentucky factory also will operate a production line of more-efficient washers and dryers and will add more than 800 jobs to help restore the once-thriving complex. “I don’t see it written anywhere,” Biden said at a tour of the refurbished facility, “that America has to settle for No. 2.”

The vice president had been invited by Rep. John Yarmuth, who represents Louisville and last year helped found the House Task Force on Competitiveness, a Democratic group that is looking at ways to keep the domestic economy ahead of the global curve. In his meetings with chief executives from Silicon Valley to the Rust Belt, Yarmuth says, it’s clear they want Washington to help tip the scale in the United States’ favor, as it did with GE in his district. “Virtually all of them said the same thing, and that was that the government has to remain a player in economic development,” he says.

Adherents of a more aggressive federal approach say the sorts of tax credits from which GE benefited are all well and good but hardly constitute a model for what the federal government should do to incubate new ideas. In an uncertain economic climate both at home and abroad, many policy-makers and outside observers say that promoting the next Google or developing the next Route 128 — the technology corridor outside Boston — will require Congress, with its diverse constituencies and overlapping committee structures, to think systematically about innovation. Promoting new technologies requires a wide reach into an array of issues, including energy, immigration, science, taxes, trade, venture capital and collaboration with states and regions. The concern is that thinking systematically has never been Congress’ strong suit.

Robert Atkinson, president of Information Technology & Innovation Forum, and like-minded observers in private industry and on Capitol Hill reject as hollow the common claim that the United States is the most innovative nation in the world. National policies, they say, are stuck in the 1990s. The country is falling behind when it comes to innovation and is badly in need of a competitiveness strategy, not a piecemeal approach. What’s required, they say, is a shift in the magnitude of government involvement.

“There are five other countries that are more entrepreneurial than we are in terms of new business start-ups and venture capital,” Atkinson said, citing statistics from the Organisation for Economic Co-operation and Development (OECD). “So we have this kind of mythology of superiority, of exceptionalism, and it’s not true — we’re not exceptional anymore.”

Indeed, as foreign governments from Germany to India and from Finland to China design strategies to keep their companies, workers and economies on the cutting edge, the United States remains stuck in a debate over the proper role for the government in fostering innovation and ensuring future American competitiveness.

Even as proponents like Atkinson call for more support for innovation, opponents of government involvement in the economy — emboldened by conservative tea party groups and broad public skepticism about President Obama’s efforts to overhaul health care, banking and energy laws — raise alarms about the inherent conflicts of a government-managed “industrial policy.”

In part due to this opposition, the innovation debate remains muddled by familiar partisan fights over government priorities, tax cuts and spending. The result is the piecemeal approach that Atkinson and others deride as insufficient and ill-considered, illustrated by the hodge-podge of programs in the stimulus. For instance, the federal tax credit employed by GE — known as the 48(c) program — is a relatively small, $2.3 billion initiative aimed only at energy efficiency and is already oversubscribed and no longer available.

The government has long played a role in fostering new science and technology in American laboratories, factories and research facilities. Beginning with Alexander Hamilton’s push for high tariffs to protect the nation’s infant economy and the development of a national system of canals and railroads to facilitate commerce, the government has long backed assistance to various U.S. industries. The Soviet launch of Sputnik I spurred a long-term commitment to defense spending that, as a side result, helped develop the Internet, supercomputers and other technologies.

The rise of Asia and other international competitors hasn’t quite set off Sputnik-like alarm bells. But the perceived gap between American and foreign innovation described by Atkinson is getting increased attention, particularly as U.S. corporations hoard capital in a tentative economic recovery and lash out against the Obama administration’s health care and financial policies — and as congressional Democrats desperately seek ways to boost hiring in a volatile election year.

The U.S. edge, many argue, is slipping. As a percentage of the total economy, America’s corporate and government support for research and development ranks seventh among the OECD’s 31 member countries. While the United States leads the world in medical technology patents, it trails Europe on environmental patents — which are seen as critical to a reduced-carbon economy.

“The United States absolutely needs a competitiveness strategy — most industrialized countries have one,” argues Sen. Mark Warner, a Virginia Democrat and former venture capitalist. “There needs to be a broader approach. A lot of what we have seen from most folks has been kind of a rehash of ’90s ideas. It’s necessary, but not sufficient.”

Changing Competition

The growing agitation stems, in part, from the way the global economic order has changed. The world economy looks far different now than it did even five years ago, much less decades ago when U.S. policy-makers confronted competitive threats from the Soviet Union in the 1950s and 1960s and Japan in the 1980s.

The United States remains the world’s biggest economy, undergirded by a strong and lasting legal and political system. And C. Fred Bergsten, director of the Peterson Institute for International Economics and a top Treasury official under President Jimmy Carter, notes that many rivals in Asia and Latin America start from a lower base of technology and education. “They’re great imitators, they’re great producers, but they have yet to demonstrate persuasively that they can generate their own technology advances,” Bergsten says.

At the same time, he cautions, the type of foreign competition that confronts the United States today is unlike what was faced during the Cold War. “The potential competitors are much more serious,” he says. “China, India, even Indonesia, Korea, these are big countries with almost limitless potential to move up the value chain.”

And there are concerns that the United States has yielded its edge. After the Internet boom and bust of the late 1990s, companies creating complex financial instruments on Wall Street — not traditional manufacturers — made the biggest profits, before helping to send the world into recession. The ability of the United States to thrive in the recovery may depend, in part, on high-value technology and manufacturing — or “a few less financial engineers and a few more real engineers that actually make stuff,” as Warner puts it.

Range of Rivals

Global supply chains are much more developed, and technology is much more advanced and widespread, allowing lower-wage countries to compete more directly with American workers. The United States is up against increased competition well beyond Asia — Germany, for instance, retooled its manufacturing-focused policies in recent years to deal with competition from China.

The result is a range of rivals at various stages of development, with varying political and economic systems.

What many of these countries have in common are coordinated government roles to promote national competitiveness. And many lawmakers from both parties are focused on getting the administration to take action against foreign innovation policies that hurt increasingly vocal U.S. companies — namely China’s mercantilist promotion of its exports and protection of its enterprises.

Yet some foreign approaches are worth emulating, say advocates of federal innovation spending. It’s not only these countries’ productive capacities that are catching up to or surpassing the United States, they say — it is also their business-focused policies.

Taiwanese leaders work with private technology companies through a government-sponsored Industrial Technology Research Institute to ensure that the island remains out front in the global high-technology supply chain. Finland’s National Agency for Technology and Innovation, known as Tekes, has helped drive the formerly farm-dependent country to the technology forefront.

Moreover, the fact that Washington has no formal innovation strategy makes it an easy choice for companies to do business elsewhere. The United States’ pioneering tax credit for research and development, created under President Ronald Reagan, is now much less generous when compared with similar benefits offered by other countries, Atkinson notes. The U.S. credit expired last December, and its renewal is caught up in a battle over deficit spending, jobless benefits and tax increases on multinational corporations. Meanwhile, as of this year, income derived from new patents in the Netherlands is taxed at a low 5 percent rate.

Talk of innovation and competitiveness strategies inevitably sounds to critics like a form of industrial policy — with the government choosing which industries, and even which companies, win in the competition for scarce resources.

Clyde Prestowitz, president of the Economic Strategy Institute, argues in a new book that it was such a mercantilist strategy — similar in some respects to how China operates today — that helped develop U.S. economic might, until the country embraced a more free-trade, market- oriented economic model in the 1950s. It’s a provocative argument.

But industrial policy is a dirty phrase among conservatives and business-friendly Democrats — including some in the White House — who contend that government attempts over the last 30 years to steer private industry in certain directions have produced little.

Amid the oil crises of the 1970s, Carter pushed Congress into allotting $20 billion for government- subsidized “synthetic fuel” plants — an effort that foundered as oil prices tumbled in the early 1980s and the business roared back.

Experts still debate the value of Sematech, a government-financed consortium of semiconductor manufacturers created in 1987 at a time of widespread worry that Japan was erasing U.S. dominance in the computer chip market.

“I don’t think we need a comprehensive industrial policy, partly because it would mean picking winner and losers, partly because that process would be inevitably captured by specific interests, and we’ve just never proven to be good at it,” says Bergsten.

Similar logic led the Senate to reject federal assistance for Chrysler and General Motors Corp. in December 2008, only to see the administration of President George W. Bush step in to support the two companies with a federal bailout. Obama continued the policy, ushering the two companies into a government-sponsored bankruptcy and rebirth, while promising that the government would not micromanage the companies’ affairs.

The White House seems to want it both ways. In a white paper on innovation released last year, the White House National Economic Council warned that “historical experience in this country and others clearly indicates that governments who try to pick winners and drive growth too often end up wasting resources and stifling rather than promoting innovation.” Members of the council, headed by former Treasury Secretary Lawrence Summers, “reject both sides of this unproductive and anachronistic debate,” the paper says.

Still, threading the needle when it comes to innovation policy is easier said than done in today’s political environment.

Republican leaders have taken aim with success at Democratic incursions into a variety of industries. Minority Leader Mitch McConnell of Kentucky complained on the Senate floor last month about “an administration that saw a crisis at some of America’s great automaking firms as an opportunity for government to extend its reach into industrial policy; which saw the panic on Wall Street as an opportunity for government to extend its reach further into Main Street.”

That argument echoes the complaints of many large companies that the Democrats’ agenda has increased their regulatory and tax burden — a perception the White House is fighting as the midterm elections approach.

At the same time, many Democrats and some Republicans, particularly from Rust Belt states with struggling factories, have been pressing the administration to establish a more hands-on policy toward manufacturing. Rep. Daniel Lipinksi, an Illinois Democrat, wants the president to form a “manufacturing strategy task force.” Republican Sens. Lindsey Graham of South Carolina, Thad Cochran of Mississippi and Olympia J. Snowe of Maine joined Democrats in signing a letter to Obama earlier this year urging similar action.

The dynamics are partially partisan, partially regional, and involve nostalgia for the economy’s traditional goods-producing base. While U.S. manufacturing is one of the productive bright spots in the recovery, its competitiveness ranks fourth in the world, behind China, India and Korea, according to a recent analysis by the consulting firm of Deloitte and by the Council on Competitiveness, a coalition of business, labor and academic leaders. More troubling, according to the analysis, is that American manufacturing is in a period of rising uncertainty as companies ship research and other functions overseas.

“There is a sense that we need to make sure that we are building things in the United States. And I think that is as much part of our national psyche as it is an actual economic issue,” Yarmuth says.

Deficits and Politics

In the latest chapter in the government-business debate, calls for a more aggressive and focused approach to innovation policy face resistance — in part, critics say, because lawmakers are letting shortsighted angst over the budget deficit cloud the need to make U.S. companies and their products more competitive globally. The United States has run a trade deficit in high technology goods since 2002 and faces a growing gap in carbon-mitigation and other clean-energy technology.

Programs like the 48(c) tax credit initiative are one attempt to address this, but they are limited in scope. Indeed, the tax credits were just one of several factors that led GE to move production lines back to Kentucky from China. The company shortened its supply line by thousands of miles. And it won a two-year wage freeze and other concessions from the local unit of the Communications Workers of America, which had little leverage with the jobless rate in Kentucky approaching 11 percent, well above the national average.

The administration has settled on one idea that few reject outright — boosting U.S. businesses with a much ballyhooed export promotion strategy. The goal is to double U.S. exports in five years, with a focus on building markets in Asia and helping companies — particularly smaller enterprises with few resources and fewer international contacts — to link up with foreign customers.

But to large exporters like Caterpillar Inc. and Boeing Co., this endeavor is hardly enough. They want less help finding markets overseas than in opening them to U.S. products. Big exporters want progress on stalled trade agreements with Colombia, Panama and South Korea and are unhappy as the European Union cuts trade deals in Asia.

Beyond export promotion, consensus breaks down, though, particularly as government red ink traps innovation issues in a contest over fiscal priorities.

The House, for instance, last month passed a bill reauthorizing and expanding science and research assistance — on the third try, and only after a divisive debate over spending, as lawmakers begin to view deficit reduction as a bigger priority than new investment. 

Questions about energy investment are sidetracked as Senate Democratic leaders decide whether to push climate change legislation. An overhaul of the corporate tax code — a priority for conservatives and liberals such as Sen. Ron Wyden of Oregon and former House Ways and Means Chairman Charles B. Rangel of New York — has never gotten off the ground.

And a tax increase for managers of private equity companies, proposed by Ways and Means Democrats to pay for an extension of the research and development credit and other tax breaks, ran into opposition from lawmakers who want to encourage private financiers to get off the post- economic crisis sidelines and funnel money to entrepreneurs.

These are dangerous and false choices, say advocates of federal innovation spending, who argue that Democrats need to realize the importance of competitive tax policies and transforming old industries in a global marketplace, and that Republicans must learn the value of investing in science and energy — and dropping knee-jerk aversions to government involvement in various industries. And the White House needs to be less timid when it comes to connecting the dots and promoting the high-tech industries of the future, says ITIF’s Atkinson.

While other countries forge ahead, he argues, U.S. lawmakers are saying, “ ‘we better balance the budget deficit so we better not invest in new innovation.’ Or the left is saying, ‘well, we don’t want to do anything on the corporate tax side, because that’s helping these Benedict Arnold corporations,’ and the right is going, ‘We don’t want to do anything on innovation policy, because that’s industrial policy.’” Atkinson, who once worked in top positions at the Progressive Policy Institute, the Rhode Island Economic Policy Council and the defunct Congressional Office of Technology Assessment, wants lawmakers to create a National Innovation Foundation and to direct money toward getting new science to market, among other things. “I’m not talking about a national strategy to pick IBM.”

Working With the States

States, however, have rarely had this problem. “No governor has ever been criticized for trying to go after high-tech jobs or going after biotech jobs or trying to help the manufacturing sector,” says Warner, who served as governor of Virginia from 2002 through 2006.

Mark Muro, director of policy for the Metropolitan Policy Program at the Brookings Institution, advocates aiding regional “cluster” programs that bridge a gap between national fiscal policies and low-level initiatives like small-business lending. Arkansas Democratic Sen. Mark Pryor and Arizona Democratic Rep. Gabrielle Giffords have bills that would support such clusters, and the stimulus law included some cluster financing.

“There’s a middle ground of institutions, networks and firms,” Muro said. “It happens in real places among real firms.”

In Massachusetts, a leader in information technology and the life sciences, that role is played by the quasi-governmental John Adams Innovation Institute, which directs state money — often with matching contributions from companies themselves — to address constraints and opportunities facing local industries, from marine research projects at the Woods Hole Oceanographic Institute to a “boot camp” for clean-energy entrepreneurs.

The biggest challenge right now, says institute director Patrick Larkin, is building a workforce to manage advanced manufacturing projects in Massachusetts, ranging from biotechnology to precision manufacturing.

“The darkest cloud is the ability to get students K through 12 and post-secondary to understand and to prepare for opportunities that would be available in the manufacturing environment — it’s not your grandfather’s manufacturing firm,” he said.

Indeed, the real issue may be figuring out what the evolving economy will look like and not missing opportunities today to prepare for it.

Deborah Wince-Smith, president of the Council on Competitiveness, praised the decision by Congress to pour $2.4 billion in stimulus money into developing advanced battery technology, like that required for electric cars. While visiting one beneficiary — Compact Power Inc. in Holland, Mich. — last week, Obama challenged his critics “to explain to these workers why it would be better for these things to be manufactured in other countries, or why the solar plants and wind turbines and biodiesel refineries that are being built shouldn’t have happened.”

But the question, says Wince-Smith, is whether Congress will combine this forward-thinking energy policy with tax and regulatory decisions that encourage companies to keep making next-generation technology here.

“Those are always looked at in separate stovepipes,” she argues. “No matter which party controls Congress, we don’t connect the dots between these policies and the impact they have.”

Wince-Smith says she is optimistic that the dynamic will change. But she also has a long memory. She was assistant secretary of Commerce for technology policy two decades ago during the administration of President George Bush, helping American companies develop flat-panel television technology — only to see production quickly shift overseas.

“We did all the research, did the start-ups on every flat panel,” she says, noting that American companies weren’t able to bring the technology to market on a mass scale. “It all went to Asia — Korea and Japan. We lost the next generation of innovation.”