fwd: Economy — Jump-Starting America

A single-issue capture on Jump-Starting America (MIT’s Simon Johnson and Jonathan Gruber) — the argument that America’s slowing growth traces directly to government’s retreat from funding research.

Notes

• A few weeks ago, I wrote about the new book Jump-Starting America by MIT economists Simon Johnson and Jonathan Gruber. It argues that the US’s slowing economic growth is a direct result of the government’s decreasing support for research over the last few decades. It’s an important argument and it’s getting attention, such as in a Wall Street Journal article headlined “US government urged to boost technology.”But there is a parallel story that Johnson and Gruber only briefly touched on in their book: private companies, too, abandoned basic science over that same period. In a new piece (pdf) by Ashish Arora at Duke’s Fuqua School of Business, the economist and his colleagues chronicle the demise of corporate science-based research beginning in the 1990s and its relationship to the concurrent drop of economic productivity.The story begins with the great boom of productivity and economic growth in the early 20th century and the post-war years. Innovation was dominated by such players as GM’s corporate research lab, IBM’s R&D, DuPont’s experimental station, and Bell Labs. Those glory days are long gone. One of the last remaining holdouts, DuPont’s vaunted central R&D lab, which had dominated US chemistry research (think nylon, Kevlar, and bioplastics) since the beginning of the 20th century, closed in 2016.Arora’s new piece expounds on earlier work in which he explained the dangers of companies abandoning basic science. Sure, the decision by large firms does make financial sense because research is expensive and the rewards are often elusive and unpredictable.  And, Arora notes, a new model has appeared: universities have picked up doing research, while large companies have focused on development and commercialization, and spinouts and startups with venture funding help to connect the efforts.But there is a big problem with that model. Large companies were particularly adept at using scientific expertise to solve practical and commercial problems—especially in areas, like basic semiconductor research and materials discovery, that require large investments and expertise in complex systems. These are areas that venture-based startups have little skill or interest in, and as Arora writes in his new paper, “knowledge produced by universities is not often in a form that can be readily digested and turned into new goods and products.”It’s helpful to read Johnson and Gruber’s findings in conjunction with Arora’s. Calculating how much the combination of dwindling government and corporate support for basic research has stunted overall economic growth is fiendishly difficult. After all, that’s really the core problem; economists have tried and failed to quantify the effects of investments in basic science on productivity. Rather, the most convincing evidence is just how clearly the slowdown in productivity has tracked the decrease in support for basic research.Given the historical record, it seems hard to deny that science-based research does improve long-term growth—and profits, even if finding the evidence to prove it has been elusive. Meanwhile, if you think the US has it bad, spare a thought for Italy.Having just returned from a short trip to Bologna for an event celebrating young Italian innovators, I was curious why the country has experienced such a notorious drop in productivity over the last few decades. The numbers are just brutal and far worse than in other European countries (pdf), particularly for total factor productivity (TFP), which measures the contribution of innovation to an economy. And what’s puzzling about it is that Italy ranksrelatively high in artificial intelligence research and advances in automation.The best explanation that I can find is in a paper by the Italian-born economists Luigi Zingales and Bruno Pellegrino (pdf); (and here’s a non-academic version of the argument, penned by Pellegrino.) They point out that Italy’s TFP started dropping at the same time that productivity in the US began picking up in the late 1990s, during the computer revolution. It’s been dismal ever since. In other words, Italy was unable to turn IT advances into economic growth.Even if you don’t care much about Italy, their conclusion is important. They argue that technological change “will foster growth in countries with more transparency and meritocracy” and blame slow growth on countries “where informality and cronyism prevail.” That helps explain the lack of productivity growth in Italy and Southern Europe in general, they write.And if you do care about Italy, here are some other thoughts on its poor productivity, from the LSE’s Centre for Economic Performance.