America’s Wrong-Headed Jobs and Innovation Policies – why we don’t create enough Amazon.com’s

by Adam Hartung | Mar 25, 2011 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in

It is unlikely anyone in business or government thinks productivity is a bad thing.  Productive students get their homework done faster, and learn more in the available time.  Productive musicians make more recordings, and tend to learn more over their careers.  And productive companies produce more goods and services with less inputs – like labor – thus offering more to customers at lower cost while making more money for investors.  At a national level, the more productive we are at everything from growing wheat to making cabinets to writing smartphone apps improves the quantity of goods available to our population – growing the gross domestic product (GDP.)  Improving productivity is one of the most critical activities to creating and maintaining a healthy economy, improving incomes and generating wealth.

Then why is American policy so anti-productivity?

American manufacturers today are about the most productive in the world.  In the Wall Street Journal's "The Truth About U.S. Manufacturing" we learn that American factory workers are producing triple the output of 1972.  The use of ever more sophisticated equipment, often with digital controls, and a higher trained workforce has made it possible to make more and more stuff with less and less labor.  While considerable manufacturing has gone offshore, it is not because our workers are competitively unproductive.  To the contrary, productivity is amongst the highest in the world! 

Unfortunately, most of America's business/economic policy at the government level has been trying to preserve jobs that are, well, not that productive.  Take for example agriculture subsidies.  They pay farmers to produce less and otherwise make less productive use of land, feedstocks, grains, etc.  By giving farmers (most of which are now huge corporations, not the "family farm" circa 1970 and before) subsidies it actually lowers agricultural productivity.

Similarly, bank and auto bailouts (and all subsidies to any manufacturer) in effect lowers productivity.  It gives money to a bank, which makes nothing.  Or to an unproductive manufacturer to keep its plant operating when the value of the output is insufficient to cover costs.    These spending programs serve only to defend and extend the least productive jobs in society – jobs that are economically unviable.  By spending money in these areas the government attempts to preserve the old (companies such as GM and Chrysler) at the expense of productivity.

America can create highly productive jobs

"Amazon.com On Hiring Spree" is the Seattle Times headline. Amazon has revolutionized book retailing, publishing and is changing a number of other markets as well.  The result is a far more productive workforce in these industries than previous competitors.  Borders, to cite a recent example, could not be nearly as efficient selling or publishing books with its out of date model, so it recently followed 90% of other book sellers into bankruptcy. The more productive company, Amazon, is hiring people as fast as it can to grow its business.  Its productivity allows Amazon to sell more and create jobs. 

Had the government chosen to bail out Borders there would have been a public outcry. Why should we protect the jobs of those store shelf stockers?  Likewise, as the number of printed books drops, replaced by digital books, should it be government policy to subsidize book (or magazine, or newspaper) publishers/printers?  Whenever a business is no longer competitively productive – whether it be agricultural, manufacturing or anything else – bailouts serve only to keep the unproductive competitor alive.  Which actually harms the more competitive company that subsequently must fight the subsidized competitor.

The right policy would be to subsidize Amazon.  Amazon is growing.  Theoretically, the more money Amazon has the faster it could grow and the more jobs it could create.  But, of course, nobody feels good about subsidizing a growing, profitable concern.  And Amazon isn't asking for subsidies, anyway.

Our public investments are shifting in the wrong direction.

The right public policy is to invest in creating new Amazons.  New businesses that create products and services which are desirable to customers, productively using resources and creating jobs.  By helping these new businesses get going the government spending creates new markets.  Government money "primes the pump" for investors.  Early stage funding allows the business to get started, create a product or service, generate initial revenues, demonstrate a P&L and entice others to invest.  The payback to society is a growing enterprise that creates jobs, both of which creates future tax revenues which repay the early investment funding.

The current administration touts investing in the tools for creating growth.  In early February the MercuryNews.com reported on a Presidential speech in Michigan, "Obama Promotes Plan for Near Universal High-Speed Wireless."  But, like previous Presidential administrations, this is just a lot of talk.  While Mr. Obama may think national wireless technology to promote economic growth is good, there is no money for it.  In the same article it is noted that Michigan congressional representatives, who resoundingly backed putting billions into the auto bailouts, question the efficacy of investing in emerging infrastructure tools.  Protecting the past, while questioning (or opposing) investments in the future.

Unfortunately, for the last 50 years American policy has been headed in the wrong direction!  Innovation investment projects peaked around the Kennedy administration (early 1960s) with several American efforts to dominate new technologies through programs such as the famous "space race."  Since then, less and less has gone into America's future, and more and more has been spent preserving the past – through entitlements, military spending and tax cuts which provide less and less incentive to invest in unproven projects.

Source: Silicon Alley Insider Chart of the Day from BusinessInsider.com

Since 1953 government "pump priming" by spending on R&D for innovations has declined by 50%!!!  No longer is even 1% of Gross Domestic Product spent on R&D.  Businesses, which require an immediate return on investment and are generally loath to spend money on things which are uncertain, have been left to fill the vacuum.  As a result, total spending has been stagnant.  Worse, most spending by business is on sustaining innovations – improvements which defend and extend an existing business – rather than on breakthroughs which create new markets, and a lot more jobs (for more on sustaining innovation investments by business read Clayton Christenson's books including "The Innovator's Dilemma.")  Investment in innovation has been woefully underfunded, allowing America's economic leadership position to shrink.

America is driving innovation offshore

The Wall Street Journal has reported "More Companies Plan to Put R&D Offshore."  When things are equal, business will invest where the costs are lowest.  With little incentive to undertake innovation in America, increasingly U.S. companies are moving their R&D — along with manufacturing, customer service, telesales, etc. — to emerging markets.  And their plans are to increase this movement offshore by 50-100% by 2015!

What will happen if innovation investments move from America into emerging markets?  Will intellectual property remain an American advantage?  Will new product development be done in America, or elsewhere?  If the manufacturing is already in these markets, is it hard to predict that new products will increasingly be made offshore as well?  Asked another way, if we outsource the innovation jobs – what jobs will America have left?

A dramatic change in American policy is needed

Last week America started bombing Libya.  Part of protecting the national interest.  But, this is not free – reportedly costing Americans $100M/day.  Two weeks is $1.4B (probably a lot more, to be honest.). Let's not debate whether this is necessary, but rather recognize (as Roseanne Rosannadanna used to say on Saturday Night Live) "it's always something."  There are programs, policies, military bases, agricultural lands, national parks and jobs to protect in every district of America – and its interests around the globe.  And that's increasingly where America's money goes.  Not into innovation.

So why are Americans surprised that job growth struggles?  When the head of GE, a company that has moved manufacturing, information technology, engineering and R&D to offshore centers across the last decade, is made head of the U.S. jobs initiative is there much doubt?  When the spending and incentives, as well as the selected leaders, have as their #1 interest preserving the past – largely in areas where American productivity lags – why would anyone expect new job creation?

America's protectionist mentality is causing its lead in innovation to slip away.  The President, administration officials, Senators and Congresspeople needs to quit thinking that talking about innovation is going to make any difference in investments, or job creation.  If America wants to remain globally economically vibrant it requires a change in investments – starting with more money for R&D via grants, subsidies and tax breaks.

If America wants jobs, and healthy economic growth, it needs innovation.  Innovation that will create new, highly productive jobs  And that requires investing in the future, rather than spending all the money protecting the past.