The Sputnik Moment

Two recent articles, one by James Surowiecki in The New Yorker and the other by Andrew Hacker in The New York Review of Books, cite Alexander Hamilton's urgings for a central government to do what is necessary to encourage the innovations of "ingenious and valuable workmen in different arts and trades" as support for their analyses of our current financial and employment picture. Hamilton, technically an illegal immigrant in his own right, pointed out the benefit our country would accrue "to open every possible avenue to emigration from abroad."

The thrust of Surowiecki's essay, "Sputnikonomics," is that, in spite of the cries coming from all sides to cut spending, we should be actively investing in research and development at a much higher rate than is our current practice. In fact, Surowiecki explains that the investments Obama's State of the Union Address called for in infrastructure, technology, and education are not just added on stimulus spending, but in fact a supply-side plan. Ronald Reagan would be proud. Increasing the pace of innovation and making workers more efficient improves our long-term growth rate by increasing supply.

Cost cutters will say we can't afford to spend money on anything. We can't afford not to. History tells us that spending on research and development (R&D) potentially creates more value than it costs. The creation of the interstate highway system under Eisenhower has returned an estimated 35% of the initial investment annually. The actual Sputnik moment spurred R&D that has changed the way the world works: GPS, microchips, the internet, satellites.

One of the reasons that we are in this financial malaise is that as our investments in R&D have shrunk (currently at only 60% of their 1960's level as adjusted for cost of living), our long term growth rate has slowed and with that so has our competitiveness.

The current climate of credit default swaps, stock holder pressure, and the unadulterated lust for profit has made private sector investment in R&D focused almost exclusively on the development side. One of the main reasons for this is that private companies don't like seeing their research creating "spillover benefits" that allow other companies to reap SOME of the profit that results from their innovation. For example, other companies are getting rich selling apps for the iPhone and iPad. That's the whole problem. So called "spillover benefits", while not necessarily helpful to Apple, are a huge benefit to the economy as a whole. Current business models don't seem to take much stock in benefiting the economy (read: society) as a whole.

Therefore we have the cancelling in mid project of a tunnel under the Hudson River. The "spillover benefits" would be huge: Less congestion, employment of thousands of construction workers, the little businesses that will crop up on both sides of the river, etc. But the recent election says that people are not in the mood to think long term. They would rather "eat their seed corn" and stick their money under an ideological mattress.

Hacker's essay, "Where Will We Find the Jobs," looks at the root of most of the electorate's outrage, the lack of job production. He makes a case for increasing our investment in education, but also stresses the changes that are currently besetting education.

He makes the rather tired point that the times they are a changing and we must change along with them. People have to rethink their educational goals. There will have to be some retraining. Colleges and universities need to rethink their approaches to vocational training.

And he tells us all sorts of disturbing facts: Even though the majority of growing careers of the future say they require college degrees, they really don't; even though everyone (read: high school counselors) say if you don't have math skills you won't be able to compete in the new technological age, that simply isn't true; the United States no longer reproduces itself and therefore relies on immigration to sustain the population; nonnative workers comprise 16% of the labor force; twenty-six per cent of U.S. physicians are foreign born; twenty-eight per cent of U.S. Ph.D.'s are also foreign born; and the list goes on.

In a nutshell, the fact is that by 2018, according to the Bureau of Labor Statistics, our country will suffer from a labor shortage. Partly from lack of proper training, but also from the fact that our work force will be smaller as the Baby Boomers all go off to retirement. To fill that gap we need to graduate tons more people. To do that we will have to invest tons more money in education. Short of that, the innovation that has always fueled and sustained our economic engine will go someplace else, some place like India, or China.

Contrary to what the Tea Party types would like you to believe (They've probably seen Dave too many times.) balancing the federal budget isn't the same as sitting around the kitchen table to figure out the household finances. That's the difference between micro- and macro-economics.