The US economy is a mess. Over two years since the Great Recession officially ended, the unemployment rate is over nine percent, the foreclosure crisis rages on, and households remain loaded up with debt. The fiscal situation of federal and state governments is dire, in part because free-market ideologues think that low taxes are a God-given right.
Much of the mess is the result of an economy in which the forces for extracting value have come to dominate the forces for creating value. The most visible venue for value extraction is the gambling casino known as Wall Street. But it is going on throughout the corporate economy as major industrial companies employ most or even all of their profits to do massive stock buybacks for the sole purpose of jacking up their stock prices.
In the process, industrial innovation — the generation of higher quality, lower cost products that provide the foundation for economic growth — is suffering from neglect. And yet we need new technologies to solve economic, social, and environmental problems more than ever. For a (still) rich country like the United States, the only way to revive prosperity is through industrial innovation that results in significant job creation.
At first sight, the innovation remedy may appear natural and easy. Throughout its existence, the US has been an innovative nation, and today still hosts many of the world’s leading industrial corporations as well as the most advanced institutional set-up for new firm formation in high-tech fields. It has an extensive system of higher education that for a century has provided high-tech personnel and knowledge to the business sector. It has governments at the federal, state, and local levels that support business through investments in infrastructure, knowledge, and all manner of subsidies. Entrepreneurial individuals are everywhere, ready to engage in innovation as employers, employees, and consultants.The 20th century was the “American century” because the United States was the world’s foremost innovation nation.
Yet in the 21st century our reputation as innovators is rapidly slipping away. What happened?
To get innovation, you need something other than entrepreneurial individuals. You need government funding of the knowledge base. The US government commits massive expenditures on new military technologies. And through the National Institutes of Health (NIH), it also funds life sciences research to the tune of over $31 billion per year. In recent years the NIH budget has been, in real dollars, triple its level in the mid 1980s and double its level in the early 1990s. As another important example, in 2001 the US government launched the National Nanotechnology Initiative (NNI) and has pumped just over $12 billion into it over the past decade, with a 2011 budget of almost $1.9 billion.
The leaders of many of the country’s most profitable industrial corporations often lobby the US government to spend more on the nation’s high-technology knowledge base, even as their companies under-invest in basic research. For example, at a press conference that the Semiconductor Industry Association organized in Washington, D.C., in March 2005, Intel CEO Craig Barrett warned:
“U.S. leadership in the nanoelectronics era is not guaranteed. It will take a massive, coordinated U.S. research effort involving academia, industry, and state and federal governments to ensure that America continues to be the world leader in information technology.”
Yet, in that same year, 2005, Intel’s expenditures on stock buybacks of $10.6 billion was nine times the NNI budget of $1.2 billion, while this one company’s expenditures of $48.3 billion on buybacks for 2001-2010 were four times the total that the US government spent on NNI over its first decade of existence.
The information and communication technology industry in general — and Intel in particular — have benefited enormously from decades of US government investment in the high-tech knowledge base. If Barrett (or Paul Otellini, his successor as Intel CEO) really wanted “to ensure that America continues to be the world leader in information technology”, then over the past decade Intel could have allocated to basic nanotechnology research a portion of the massive funds that it has used to manipulate its stock price through buybacks.
As another example, in June 2010, the self-styled American Energy Innovation Council (AEIC), made up of current and former heads of Cummins Engine, Du Pont, General Electric, Lockheed Martin, and Xerox as well as John Doerr, partner in the venture capital firm, Kleiner Perkins Caufield & Byers, put out a plan for “America’s Energy Future” that called for the US government to increase spending on clean energy innovation to $16 billion annually, up from a current annual government investment of $5 billion.
In a press release, entitled “American Business Leaders Call for Revolution in Energy Technology Innovation”, Doerr, the venture capitalist in the group, stated:
“When our company [Kleiner Perkins] shifted our attention to clean energy, we found the innovation cupboard was close to bare. America has simply neglected to support serious energy innovation. My partners and I found the best fuel cells, the best energy storage, and the best wind technologies were all born outside the United States. Other countries are investing huge amounts in these fields. Without innovation, we cannot build great energy companies. We need to restock the cupboard or be left behind.”
The corporate executives who constitute AEIC are looking for the US taxpayer to foot the bill for restocking the cupboard. What about contributions to a national clean energy effort by business corporations that ultimately stand to profit from these new technologies? Over the decade 2001-2010, the six corporations whose current or former leaders are represented on AEIC wasted a total of $185 billion — an average of $18.5 billion per year — buying back their stock, including $110 billion by Microsoft and $48 billion by General Electric. For these six companies over the past decade repurchases were 54% greater than R&D expenditures.
Innovation requires complementary investments by business and government. The government can only do so much, especially with free-market ideologues ranting that the government is already doing too much. A prime reason why the United States is no longer the “innovation nation” is because its major industrial corporations have been obsessed with “maximizing shareholder value” rather than investing in basic technology research.
To slightly paraphrase John F. Kennedy, ask not what your country can do for your corporation but what your corporation can do for your country.
This article was originally published in the New Deal 2.0 blog.
