Norman Augustine
Innovate or Evaporate
April / May 2009
Volume 7 Number 2
If we don't tackle our severe structural problems, which are just as important as our economic problems, America is fated to become a loser in the global marketplace.
We are in a financial mess (to borrow a term from economic theory). In fact, we are in not one but two financial messes.
Causes of the first mess? Individuals accepted mortgages that they could not afford. The mortgages were offered to people by firms who didn't much care if the people couldn't afford them. The firms were encouraged by the government in its zeal to promote home ownership. The mortgages, repackaged and mislabeled by bankers, were incorrectly assessed by the ratings agencies, ignored by regulators and fueled by excessive leverage and greed. That's about all it takes for 20,000 Americans to lose their jobs each day and to destroy some $100 trillion of global wealth. As Senator Everett Dirksen once said, "A billion here, a billion there; pretty soon you're talking real money. "
But even more dangerous, as if Mess No. 1 were not dangerous enough, is the erosion of the nation's economic system being wrought by much more fundamental structural problems at the very foundation of that system. The latter takes the form of increasing deterioration of the ability of Americans to compete for jobs in the global marketplace—€”whether that marketplace happens to be in disarray, as it is at the moment, or in a more vibrant condition as it has been in the recent past.
America's political leaders, recognizing the dangerous impact of toxic mortgages, have devoted heretofore unimaginable sums to bolstering the economy through stimulus packages and loans. Much of the stimulus funds are to be devoted to "shovel ready" projects needed to repair America's deteriorating physical infrastructure—€”bridges, dams, tunnels, highways, and the likes. But a stimulus package that addresses only the physical infrastructure is likely to build a bridge to nowhere. What is to happen three years from now when the bridges and highways are built and the trillion dollars has been spent? Will another such package be required? And then another? What is needed is a stimulus package that will bail out the future, not just the present.
Fortunately, the legislation recently passed by the congress and signed by the president seems to recognize this latter consideration and provides at least a (comparatively) modest investment in the future of America beyond the immediate crisis. This takes the form of investments in basic research and in education, particularly pre-K-12 education in reading, science and mathematics.
In the 21st century global economy American companies are being required to compete on a global basis to create jobs. But sometimes it seems as if our nation's capital is populated with individuals who are strongly in favor of jobs but strongly opposed to employers. And when firms seek to create jobs in America, they often find themselves operating at a not-inconsiderable handicap.
This in part takes the form of high labor costs: 20 assembly workers can be hired in Vietnam for the cost of one in America; eight engineers can be employed in India for the cost of one in America; five chemists in China and so on.
If America is to compete in a knowledge economy—€”one where investment capital seeks opportunity wherever it is to be found around the globe and does so at the speed of light, our only hope is to be a world-innovator: that is, to create new knowledge through leading-edge research, translate that new knowledge into new products and services through world-class engineering and move those products and services so as to be first in the marketplace through extraordinary entrepreneurship.
America's investment in research in the physical sciences and engineering has languished for over two decades and in the health sciences for the last several years. Surveys of corporate CFOs indicate an overwhelming willingness to reduce or eliminate investments in research in order to meet their next quarter projections of earnings. The impact of this pressure for short-term results from the marketplace is reflected in the demise and eventual sale (to a French firm) of such immeasurably valuable national assets as the Bell Laboratories, home of the laser, semiconductor—€”and numerous Nobel Laureates.
The situation is even more disconcerting with regard to human capital. Our universities continue to be the best in the world; however, two-thirds of their graduates in engineering are non-U.S. citizens. Part of the reason for this is that our K-12 system, on average, is, well, abysmal—€”particularly in the critical fields of math and science. The most recent international student test results were summarized in the media as indicating "stagnation" in science but a "jump ahead" in fourth-grade mathematics. Putting aside the fact that few corporations hire fourth-graders, the media neglected to take note of the fact that at the rate at which we "jumped ahead," it will take another 85 years simply to catch up with the children of Hong Kong—€”assuming, of course, that they do not improve in the meantime.
In summary, America's ability to compete in jobs for the current members of its workforce and for their children and grandchildren will depend upon our ability to innovate. Portions of the stimulus package that are pork-free and relate to science and education are important steps in the right direction—€”but they represent only a single injection whereas sustained support over many years will be required. Americans have become accustomed to a position of leadership to the extent that it is often assumed as a basic "right." But it is useful to recall that in the 16th century the people of Spain undoubtedly felt, with some good reasons, that their country was the world leader; in the 17th century it was the people of France; in the 19th century, the U.K.; in the 20th century, the U.S.—€”and, if Warren Buffet is right, the global leader of the 21st century is likely to be China.
If America wishes to be among those who prosper over the longer term, it is in our power to do so. But we will need to address the structural problems that are undermining our ability to compete in the global marketplace, most particularly our underinvestment in basic research and our underperforming public schools. The former will require continuing the currently increased funding of basic research by the federal government. The latter will, among other things, require introducing the notion of an appropriately controlled free enterprise system; that is, adopting in our 15,000 public school systems such extraordinary concepts as measuring progress; paying good teachers more than poor teachers; and paying physics teachers more than physical education teachers. The outlook is not necessarily good: not altogether atypically, a bill was only recently introduced in the legislature of one state that is one sentence long: "A salary of a teacher may not be based upon the measurable performance or productivity of the teacher or a student of the teacher."
Norman Augustine was chairman of the National Academies of Science Committee that produced the major report, Rising Above the Gathering Storm, which was the foundation for the America Competes act. He is the author of Is America Falling Off the Flat Earth?, another National Academies report. Augustine is the retired chairman and chief executive officer of Lockheed Martin Corporation and a frequent contributor to Innovation.
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