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How Innovation Plays Second Fiddle

The United States is falling behind in international economic competitiveness, according to recent research by the Information Technology and Innovation Foundation. While our 2009 Atlantic Century report ranked the United States sixth of 40 nations in “innovation-based competitiveness,” we are dead last in the rate of progress over the last decade. That poor performance is finally leading to action. Sens. Mark Warner of Virginia, Amy Klobuchar of Minnesota, and George LeMieux of Florida this year introduced legislation requiring the White House to develop a “national competitiveness strategy”—and now CAP has released an important report urging the federal government to rethink how it develops and coordinates competitiveness policy.

These are important steps. At the end of the day, however, any innovation and competitiveness strategy will be shaped and implemented by the administration in power. Economic policy today is the purview of the Treasury Department and its allies at the White House’s Council of Economic Advisers and Office of Management and Budget. Dominated in both Democratic and Republican administrations by financially oriented neoclassical economists, these organizations largely ignore the real economy in favor of the financial one and believe that in the absence of “market failures” government action only makes things worse. Unless this perspective changes, any national innovation and competitiveness strategy will at best be implemented at the margins of overall national economic policy.


We only have to look at the United Kingdom to see what happens when neoclassically oriented treasury departments have responsibility for national economic prosperity. That country’s precipitous industrial decline in the 1960s and 1970s came at a time when economic policy dictated by Her Majesty’s Treasury. It cared more about factors such as inflation, balance of payments, savings rates, and preserving the value of the pound sterling than it did about the United Kingdom’s actual industrial capability. Other ministries might have wanted to help the “real” United Kingdom economy, but they were always shunted to the sideline by the big boys at Treasury. In his The Wasting of the British Economy: British Economic Policy 1945 to the Present, economic historian Sydney Pollard writes:

We are looking for principles held by British policy makers but not by others—except those, like the United States in recent years, that have shown equally dismal economic results…There is one and only one principle which will fit the bill: it is the principle of concentrating first and foremost on symbolic figures and quantities, like prices, exchange rates and balances of payments, to the neglect of real quantities, like goods and services produced and traded. In particular, the subordination of one to the other is such that whenever there is a clash of interests, the real must be sacrificed to the symbolic.

Unfortunately, the United Kingdom and United States are cut from the same cloth in this regard. As long as Treasury, CEA, and OMB call the shots, U.S. relative industrial decline, if it is even acknowledged, will be seen as a natural response to market forces. A strong dollar will be the official government policy, budget balancing will trump investing in innovation and competitiveness, and any kind of manufacturing strategy will be seen as inappropriate “industrial policy.” For these officials, the actual industrial composition of the U.S. economy is irrelevant. As former CEA head Michael Boskin put it: “potato chips, computer chips; what’s the difference?”

At the end of the day, neoclassical economists in London and Washington not only offer little in the way of solutions, they actively work against them. It’s too late for the United Kingdom to resurrect its industrial capabilities, but it’s not too late for us. Unless we limit the U.S. Treasury to fiscal policy alone, we are unlikely to create and implement the kind of national innovation and competitiveness strategy our country needs.

Originally published at the Center for American Progress.


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