 Good morning. I'm Michael Lin, the Policy Director of the Economic Growth Program here at the New America Foundation, and I'd like to welcome you to this event on the publication of the new book Innovation Economics, The Race for Global Advantage, by Rob Atkinson, the founder and president of the Information Technology and Innovation Foundation, and senior analyst at the ITIF, Stephen Azell. In this election season, as in most, issues ranging from manufacturing, trade, government policies to stimulate innovation are central to the presidential campaigns as well as to other campaigns around for Congress and the Senate. Frequently, we get sound bites and slogans and ideological approaches to these issues, so it's a great pleasure and a privilege to have Rob Atkinson here, who's widely recognized one of America's leading experts both on innovation and on technology policy and manufacturing in the United States and the world here to help explore some of these issues. The format of this presentation will be as follows. Rob will give a brief discussion of innovation economics. Then we will have a brief conversation exploring some of the issues he raises his presentation. Following that, we will move to questions and discussion with you in the audience. Please join me in welcoming Dr. Rob Atkinson. Well, thanks, Mike. First of all, I'm really, really glad to be here, and sometimes when we're trying to do our work in this area of, I don't even want to call it heterodox economics because that implies anything else, but sort of an economic view of the world that is in the decided minority. It's really been a great pleasure to know Mike because we share the same view and we go out and have lunch together and cry over our wine and how we're in the minority view. So you'll see that today when what I talk about. So anyway, so what I want to talk about today, rather than sort of, I want to do a little bit different presentation than I've done a couple of times on the book before. And what I want to talk about is really two fundamental things. One is how the U.S. has fallen behind in the last decade in a very serious, structural, not cyclical way and how that has been a contributing, if not major factor in the financial crisis and in the current unprecedented anemic recovery. And then rather than go into a lot of detail about what to do, which I actually think is really not very important fundamentally, I don't think it's an issue of not knowing what to do. I think if we were to assemble 10 or 20 experts who think about this issue from a structural innovation perspective, we'd come up with pretty much all the same answers. The real question is why aren't we doing it? And I want to focus a little bit on that. Okay. So that's what happened. The economy crash really again unprecedented collapse. Nobody predicted it. We was what we're here. Why did it collapse? Because we were investing in housing. If you look at the case filler, 10 and 20 city index, what you saw was starting in 2000, this unprecedented rise of housing prices way, way above their historical average, their historical growth. So this anomaly, all this money pouring into housing, and then obviously that one's sustainable. Real question is not why didn't people see it? That's actually an interesting question. But the more important one is why did this happen? Why did all of this money go into housing? And in theory, people who were being paid enormous amounts of money on Wall Street, who are supposedly the best and the brightest just simply had a failure of massive proportions. People who are, you know, PhDs and quants and all of a sudden, and they just failed. Why was that? I think it's, as I said, it's because the well of investment, if you will, dried up. So what do we mean by that? We essentially went from making things to making money. So there's a great line by Calvin Coolidge back in the 20s, the business of America is business. And actually, that was a really apt assessment. And now the business of America is making money. It's very different. So what do I mean by that? Well, just a good example. If you look at the ratio of commercial and industrial loans to consumer loans, what you find is increasingly lending institutions, we're not making industrial commercial loans. They're making consumer loans, cars, homes. And why does that matter? That matters because homes are not an investment. Cars are not an investment. If I buy a new home, I'm not more productive. If I buy a new car, I'm not more productive. If I invest in a new machine, or I invest in a new piece of software, I become more productive. The economy becomes productive. It's an investment, essentially, that pays off in theory with higher net present value. Housing doesn't do that. So you see this in the 90s, you can see that there was an increase in corporate investment in machinery and equipment. Let's see. Anyway, it doesn't do that. Okay. Over there, the blue line, and an increase much, much faster than housing. And what you saw in the first half of the 2000s is that there was a big, big decline of demand by US corporations for money. They just simply didn't need as much money anymore from Wall Street, from banks, because they weren't investing anymore. The growth of investment in new machinery and equipment by US companies went to its lowest level in since the Great Depression. You can see this here. Just in five years, the growth of private investment in equipment and software, in other words, this is all the stuff that we invest in, make the economy more productive, grew 81%. In the last 11 years, it grew 20%. It's actually negative since 2006. So you can see this also, venture capital. Venture capital fell significantly. IPO's initial public offerings fell significantly. Why did dollar this fall? Why was there less demand for real investment capital of what Wall Street historically provided? That was Wall Street's core function, was to amass and collect capital and then to find the best places in the economy to invest it. They didn't do it. They didn't invest it. They spent it. A big reason for that is that US companies were still investing. They just weren't doing it in the US as much. This is essentially that blue line reflects the ratio of investments by US companies overseas versus domestically. You can see it doubled. There's a recent announcement the other day about 30 major semiconductor builds in the world by US companies only, I think, believe two are happening now in the US. So globally multinational US companies have an enormous array of options and they're investing increasingly outside the US. There's another interesting thing. This is a data set that looks at how many new expansions or relocations there are of big industrial companies, big corporate headquarters, regional headquarters, these kinds of things. A facility like an insurance company is going to open up in Iowa or a factory is going to open up in Dallas. What you can see again, very significant drop in the number of these because they're not happening in the US to the extent they used to happen. Same thing with foreign direct investment. Inward foreign direct investment fell, outward foreign direct investment dramatically increased. So again, US becoming a less competitive place for investment. Now one of the biggest areas we see that change in is in manufacturing. We had the largest loss of manufacturing employment that we've ever had in the 240 year American history in 10 years. So we had a loss of manufacturing jobs greater than the Great Depression. So in the Great Depression, from the peak to the very bottom of the Great Depression, we lost about 31% of our manufacturing jobs. Here we lost 33%. And by the way, they were the losses in the Great Depression versus here they were about 15 times more concentrated in manufacturing. So in the Great Depression, we were losing jobs in everything. Retail, wholesale, banking, manufacturing. In this last decade, the losses were very, very concentrated in manufacturing. Now some people are going to argue that you may be thinking of yourself. Well, this is not really a problem because we lost those jobs because of high productivity. Manufacturers become increasingly productive as they put in new machines, new computer aided design, etc, etc. And they just don't need workers. I don't have that slide, so I'll explain it to you. The reality is US manufacturing output. So this is inflation adjusted output. How many widgets they're producing in 2000 versus how many they're producing at the end of 2010, when measured properly, and I'm happy to go into details on what that means, when measured properly actually declined 11%. Again, that's never happened in American history that we can discern where we've lost output in a decade. One of the indicators of that, which again I don't have the slide, historically US manufacturers added capital stock every decade. So every year they would add more machines, more widget makers, more software. And the BEA, Bureau of Economic Analysis, just adds that up and tells you every year how much capital stock manufacturers have. And basically in the 50s, 60s, 70s, 80s, and 90s, the average rate was between 35 and 55% expansion of capital stock. So in other words, every decade, at the end of the decade, manufacturing capital stock is a lot bigger. This decade was essentially zero. Again, first time that's ever happened. So really something unprecedented happened, which has never ever happened in our history before. And one of the places we see that is in the trade balance. So what was happening? What was happening was we were facing intense global competition, not just for commodity t-shirts, not just for call centers, not just for widgets, but for the highest value added production in the world. And that's a good reflection of that. The only reason this goes up is because we stopped buying, not because we became any more competitive, and that numbers just continue going on. So in other words, we started to run massive trade deficits. We now run about $110 billion trade deficit in high technology products. So in the 90s, when we started to run a somewhat serious trade deficit here, the story that Washington told itself was, look, don't worry about that stuff, because we're still really, really good at high technology. And in 2000, we were, we were running $100 billion trade deficit in high technology products. Now we've lost that. We're running a $100 billion deficit. And as you'll hear, the new story is, don't worry about that. We're doing R&D and we're doing design. Look at Apple. I'll explain that in a little bit. So lest you say, well, manufacturing doesn't matter, which I'll explain. This is a study we did that looked at 44 countries and it looked at things like how many new business startups do you have in your country? How much venture capital do you have? How many scientists and engineers? How much corporate R&D? How much government R&D? How high is your productivity? And what we did is we looked at all of those together. We combined them into one metric. And then we said, where were countries in 2000 and where were they in 2011? Who made the most progress? The United States made the second to least progress only behind Italy. In other words, every single country except Italy made faster progress on things like adding to venture capital, adding to corporate R&D, adding to scientists and engineers. Now you can say, well, China doesn't matter because they started from a low base. Sure, that's true. But look at the countries that are in there that didn't start from a low base. Japan, Austria, Finland. You know, I'm going to ask you a question, but you're going to know the answer because whenever you ask a question it's always a trick question. What country grew faster in the last decade in per worker income? Japan or the United States? Now, how many people think it's Japan? How many people think it's United States? How many people have no clue what I just said? Okay, it's Japan. World Bank study just came out. It's Japan. Japan had faster per worker income. Now, why didn't we find that a surprise? Because Japan is losing a percent of its population or percentage of its workforce every year because Japan is aging so rapidly. We're gaining workers because we have higher fertility and we have higher immigration. So our economy looks like it's doing better just because we just have more people growing. But if you look at what really matters, which is per worker income change, that's the single most important indicator of economic success. Japan outperforms us. Okay, so what happened here? What happened here was essentially companies went from after the post-war period they started shopping the state. So after World War II, GM started saying, you know what? We don't need to be in Michigan. We can be in Georgia. We can be in Alabama. GE said we don't need to be in Schenectady. We can be in New Mexico. But what happened in the last decade is that changed and they went to shopping the world. That's really the fundamental change. Companies now are, you know, Sam Palmosano wrote that famous article about the globally integrated enterprise. It's really what it is. It's now enterprises that are just, you know, to all intents and purposes are global in nature. The entire world is their production platform. Now you can have a discussion about whether you think that's moral or right or whatever. Sort of doesn't matter because that's what's happening. The other component there, so you had this, essentially this emergence of a global production system, partly through IT enabled connected supply chains. But the other reason you had this is because in the last decade, countries woke up and said we want to win in the highest value added production. You know, a decade ago, it wasn't that long ago that Europeans were actually talking about saving their shipbuilding industry, their steel industry, and their coal industry. They don't talk about that anymore. What they talk about is how are we going to be the world leader in nanotechnology, robotics, clean energy, advanced manufacturing and the like. And that's pretty much what almost every country now has done. Nigeria, no sorry, Ghana of all places just came out with a high technology strategy about two years ago. So what these countries are doing is they're putting in place a suite of policies that essentially is a sign that says if you're a high value added producer of goods or services, you should locate in our country. And we're going to do things for you like we're going to have much, much lower corporate taxes. The U.S. now has anywhere between the sixth to first highest effective corporate tax rate, not just statutory, effective corporate tax rate in the world. We now have the 27th most generous R&D tax credit in the world, down from number one about 15 years ago. Other countries have expanded their support for science, technology, and research. Anywhere in most cases twice as fast as America, but in many cases four times, six times, ten times faster. United States, you see the same thing on university R&D. Again, if I were to ask you, do American universities, are they in the top five in the world in government and corporate support for scientific research at universities? How many people are going to raise your hand? A lot. Actually, we're 22nd in the world. So everybody, we were surprised when we found that. There's a study on our website if you want to see it. Anyway, there's very good OECD data, which I'm happy to share that study with anybody who wants to look at it, but we're 22nd. Other countries in the last decade said, we're going to put a boatload of money into our universities and we're going to tie it to commercialization. We're going to try to get as many new companies. We're going to try to get discoveries and out into the marketplace. But the other thing that these countries are doing is they're supplementing these good policies with a suite of bad policies. And by that, we essentially mean what we've termed in the book, innovation mercantilism. In the old days, countries would do they, oh, we want to save the shoe industry, we're going to slap on big shoe tariffs. Now they're a lot more sophisticated. And what they do are things like China's Indigenous Innovation Program, which is a whole suite of policies around manipulated government procurement, manipulated product standards, manipulated force technology transfer. The Indians now have a new program that is about to be rolled out, we fear, called PMA, Preferential Market Access, where the Indian government has said, by 2020, we're going to have a requirement that 80% of all computer equipment is made in India that's consumed in India. So this is not about just sort of fair trade and in competing fairly, this is a whole suite of policies that countries are saying, you know, these other guys have these advanced technology industries, we want them, we're going to get them now, we're going to cheat. So all of that's gone on and the US essentially has failed to respond. We have not cut our corporate tax rate, we have not essentially increased the R&D credit, we have been essentially stagnant on government support for research and development. We have not really responded on high skill immigration, we haven't really responded on a national policy for producing more scientists and engineers, we haven't, there's no national policy in any serious way to transfer technology. So we haven't responded, now the question is why haven't, I won't go through that, so why haven't we responded? That really should say US is not, it's Cuba, so Cuba hasn't responded either. Why haven't we responded? So there's a lot of reasons, but I'm going to basically just focus on one and then wrap up. I think the single biggest reason we haven't responded is because of what you could call this Washington economic consensus. And for those of you who know this term was coined by Oliver Williamson a few years ago, it was Williamson, to sort of say, look, there's the right way of doing economic growth policy and there's the wrong way, we get it right, all you other people around the world get it wrong. And that economic, Washington economic consensus is really grounded in a branch of economics, I shouldn't even say a branch, it's sort of like the entire tree called neoclassical economics. So most economists, if we're going to walk three blocks over here to AEI or six blocks over here to Brookings, doesn't really matter what think tank you go to in Washington, with the exception of New American and ITIF probably, you're going to be talking to neoclassical economists. Now why is that a problem? But by the way, it's not even you're talking to them, it's as Keynes once said, most policymakers are channeling long dead economists. Here, most policymakers are channeling alive economists. So when you talk to a policymaker on the Hill or in the White House, they have internalized in their mind, essentially this neoclassical frame. Now that's a problem because we that problem with neoclassical frame is it simply can't even acknowledge that we have a problem. So the first step of acknowledging and fixing a problem if you're an alcoholic, since I've been told this, is you're supposed to admit that you're an alcoholic, and then you start treatment. Well, if you're a failed competitor, the first step is to admit, we are a failed competitor. Neoclassical economics is incapable of admitting that because in the neoclassical model, as long as you don't distort prices and restrict entry and exit to markets, markets always get it right and produce optimal outcomes. So by definition, it's a completely circular logic. The outcome that we have has to be optimal. So now we look at all of those facts that I've put up there, and what you'll see is neoclassical economists spin them, interpret them to essentially say, that is actually a good outcome. Because if it was not a good outcome, that is fundamentally strikes at the very heart of neoclassical economics. It means something is wrong. It means that even though we didn't distort prices here, even though the US market is the most open in the world for entry and exit, something went wrong. That simply cannot be in the neoclassical model. So what you have is you have a set of essentially excuses. One of the things that we talk about in the book, which to us was pretty eye-opening, actually. In writing the book, we did a lot of research on the United Kingdom because we were trying to find a country that had failed economically, not like a basket case, a failure of corruption like Rwanda or something like that. But a leading country that was doing pretty well and fell behind, declined, deindustrialized. And the UK is the poster child of that. The UK essentially led the world, with the exception of the US, in the post-war period and just failed. And particularly in this period, about 65 to 85 was really when bad things happened. And so when you go and you look at virtually all of the literature about UK industrial decline in that period, there's a lot of books written, a lot of scholarly articles. What you find is actually very interesting is that we came up with 20 leading explanations of UK failure. And then we said, does the US have any of those characteristics? And in fact, it had 19 and a half of those, essentially more or less all of them. So every single thing the UK did wrong, defender strong currency, not admit that manufacturing is important, labor management conflicts, etc., etc., we did all of them. We're doing all of them. But the real interesting one to me is the UK's dominance of neoclassical economics. So neoclassical economics is largely an Anglo-Saxon thing. You go to Europe, or continental Europe, it's much, much weaker. So it's a wonderful book by again, Pollard, and he writes, quote, it may well be that the very quality of post-war UK economics, the greater sophistication of its theoretical constructions, its much refined statistical and econometric methods have put it out of touch with real economic situations. Economic theory, as it has developed in the Anglo-Saxon world, turns out to have been a handicap rather than an aid to good policy. If you look at all of that greater sophistication of theoretical and reliance on statistical econometric methods, that is US economics. I encourage you to go sometime and look at any scholarly economics journal, and if you can understand it, more power to you, because it's largely all mathematics now. So another great quote I love by Pollard. He says, in the 60s, the comments in reference to the attitude of British economists towards the French policies to steer investment towards high-tech industries like steel or the time high-tech, he says, quote, such a plan would have been thought to be much beneath the dignity of British economists trained to think in macro figures. They would have left such tasks to hacks and East Europeans. And that's pretty much what we have here. They leave such tasks to hacks like me. So why is that a problem? Because when you then go out and sort of have to go to the first fundamental question, not whether we're in decline, but whether we even compete. So that's really the first question. Are we competing with other countries? What you find is that, Michael, is that a sign? Okay. I'm almost done. What you find is that neoclassical economists simply will be in denial that we compete with other countries. Paul Krugman on the left says, quote, the notion that nations compete is incorrect. Nations are not to any important degree in competition with one or other. He said that this year. Jane Gravel, Congressional Research Service says, competitiveness is a term without meaning. Kevin Hassett, conservative AEI economist says, non-economists regularly appeal to competitors when motivating a wide array of policies while economists, what he means by that is neoclassical economists, protest or look the other way. So neoclassical economists just simply say that we're not in competition. For them, Boeing competes with Airbus, but we don't compete with Europe. Now, why do they say that? They say that because in their mind, if Boeing goes out of business, because it's competing with Airbus, by the way, it's not competing with Airbus. It's competing with Airbus and the European governments. But if Boeing goes out of business, as long as we have open markets, as long as we let bankruptcy courts redispose Boeing assets, and as long as we don't try to keep Boeing holding on to those workers, we will be better off. We will be better off because those workers will flow into new occupations and new industries and higher value added things. There's only one problem with that, which is that aircraft production is the highest value added industry in America. So really hard to imagine how when you lose aircraft production, you can go into something that is even more high value added. So if competitiveness is not a problem, then obviously the trade deficit can't be a problem. So we're running the largest trade deficit in world history. And that to me is a symptom that suggests perhaps there's a problem. But no, you can ignore that, wipe that away if you're a neoclassical economist. Again, I can 20 quotes if I wanted to, but let me give you two. Former Bush 2 economist Greg Mankiew says, the trade deficit is not a problem. It is a symptom of a problem. The problem is low national savings. Council on competitiveness says the trade deficit stems from global financial imbalances rather than the inability of American companies to compete in global marketplace. So you've automatically defined the trade deficit as oh, it's our fault. We don't save enough. Well, the problem is that that's essentially an equation savings on one hand. Trade deficit on the other hand, it's not a causal factor. It's actually the other way around. The trade deficit is causing low savings, not the other way around. Well, I'll cap you going into more detail on that. So that's second. The third thing is if you really want to be in denial with this view that markets always get it right, then you have to be able to explain the catastrophic loss of U.S. manufacturing employment. That's the most sort of striking thing that's happened. Well, that's very easy for folks. Ken Green, who's at AEI, has written, as long as China is selling us the products we need, the location of manufacturing isn't critical to the economy. Columbia University Jagdish Bhagwati says anybody who thinks manufacturing is suffering, suffers from a manufacturing fetish, which I clearly do. Larry Summers, while he was in the White House, said America's role is to feed the global economy that's increasingly based on knowledge and services, not making stuff. Christina Romer, again, Obama. I mean, you want to explain why Obama is doing much more on manufacturing? I'll give you two reasons. Larry Summers and Christina Romer are no longer there. People who are there, Gene Sperling and others, get this question much more deeply. But anyway, Christina Romer, after she left the White House, claimed, manufacturing don't need special treatment, and that there's really no difference between them and a barbershop. Potato chips, computer chips, what's the difference? And on the last point, you see this argument about manufacturing. They will just simply say, look, we're losing manufacturing jobs because productivity's gone up. And by the way, everybody's losing manufacturing jobs. So, again, define away the problem, and then you don't have to really acknowledge that perhaps the core foundation of your economic theory is bankrupt. So, Larry Summers, for example, in December 2010 said, you don't succeed by producing things in exactly the same way, as if, by the way, people who are calling out this problem of competitiveness are essentially saying, let's restore the t-shirt industry. That's not what the argument about. The argument is about not holding on to old production. The argument is about advancing into new production. You look at where the Germans are. Germany actually, if you define, if you divide manufacturing output into four groups, high value added, middle high, middle low and low, just to take your entire manufacturing and put it into those four groups, the Germans actually are about 15 percentage points higher in high value added and mid high value added than America's. America now specializes in low value added manufacturing. And again, this is not, according to all of these theories, that's not what's supposed to be going on. So, Larry Summers says, there's no going back, technology accelerating for me. And then this is my favorite quote of Larry Summers of all time. China has seen manufacturing employment decline by more than 10 million jobs over the most recent decade. This is one of those things. It's kind of like, this is one of those urban myths that I guarantee you in 20 years, people will be saying, you know, China lost manufacturing jobs. Everybody says this now. Well, let me explain what actually happened. If you go back and you got to read, so there's a report that the global consulting firm came out with said, China lost manufacturing jobs. You actually have to understand what really happened there. What really happened there was China changed the statistical system of measuring what they called the manufacturing job. And in the old series, if you were a blacksmith in a little village, a little peasant village in China, you were counted as a manufacturer. Chinese government rightly said, you know, it's not really manufacturing. We're going to take those people out of the statistics, starting in 2002 or something like that. And then in 2003, you saw the loss of like 30 million or, you know, an amazing number of manufacturing jobs. They didn't lose manufacturing jobs. They reclassified jobs out of manufacturing into something else. In four years, China gained more manufacturing jobs than we have. So the fact that leading economic scholars in the White House, and by the way, it really doesn't matter for Romney Windsor Bush or Obama Windsor, new class economists are going to dominate any administration. It's not a political thing. The fact that a leading person who's head of the National Economic Council can repeat essentially what is a falsehood that China lost manufacturing jobs to then excuse the fact that we lost manufacturing jobs, I find really, really quite striking. Because again, if you go back and look at that data series, they didn't lose any manufacturing jobs. They reclassified them. So let me just close by saying, you know, I've gotten into this sort of long, long litany, but why this is a problem. I really do think this is a problem because when you go up and talk on the Hill or the White House, for every person who goes up and talks about competitiveness, there are 10 people who go up and say, everything's fine. Leave it to the market. The most government should do is, you know, just make sure our education system works, make sure the taxes aren't too bad, make sure we sign more trade agreements, you know, maybe expand NSF funding. That's kind of the most you'll get. And even that a lot of them won't advocate for. So essentially what we need is this Washington innovation consensus that says, we compete with other countries. We're losing. Innovation is the most central part of economic competitiveness, whether it's innovation in making a new iPad or a new production process or a new business model. And that absent government proactive innovation policies we will have be suboptimal on the production of innovation and our ability to compete. So with that, I'll stop. Michael, thank you. Well, much to my delight. Can everyone hear me? To my delight, Rob ended his presentation with a picture of a light bulb, bringing to mind the old joke of how many neoclassical economists does it take to unscrew a light bulb. The answer is none. If it needed to be replaced, the market would do it. So I don't want to spend too much time on the theoretical aspect, but I do want to ask you a question. It's more of a historical, sociological question than anything else. In the 1970s and 80s, Paul Krugman, another economist named Alpinon and others, came up with what's called the new trade theory or strategic trade theory, that there had been a Heckscher-Ohlin theory about factor endowments before that. But to this day, most economists and most students are taught the theory of comparative advantage, not absolute advantage, but comparative advantage, going back to David Ricardo in the early 1800s. The new trade theory said that in an industrial economy, the most advanced and important industries tend to have increasing returns to scale. You mentioned aerospace, steel. The larger your market, the larger your factories can be, the larger the actual, you know, the steel vat, or the production machinery, the lower the cost of each additional unit of output. The upshot was that a country which got a head start for whatever reason in one of these particular industries with increasing returns to scale, once it had achieved dominance, it wouldn't necessarily even have to protect its own market, so the barriers to entry would be so high for other countries that it could monopolize that industry. And what's more, because it was so productive, in theory, it could make all of the planes or shoes or cars that the rest of the world used, right? So what happened in the 1980s and early 1990s was whenever anyone pointed out the practical implications of this, which meant that countries by rigging their markets to promote some of their own nationals in these increasing returns to scale industries, they were attacked by economists including, among others, Paul Krutman, the author of the theory, you know, who bitterly attacked people and said, well, this is just a theory, it can't be applied in the real world. While he was arguing that his own theory could not be applied in the real world, South Korea applied it, going as a result of various industrial policies from having no commercial shipping industry whatsoever, to now it's about 50% exploiting this phenomenon. It's my impression that to this day, economics courses are teaching the 1817 Ricardo theory instead of this clearly correct 1980s theory. Is that your impression? Yeah, it's almost as if we've gone backwards, because I think in the late 80s and early 90s we kind of had a apex of sophistication and then it was kind of almost like that was just too threatening to the status quo and it became pushed aside and put into the closet. I was interviewing for an economist, actually for 18 months, I was one of those people who was keeping the U.S. jobless rate high. And finally, looking for an economist which I sort of became depressingly convinced was a null set, which was somebody who understood economics and innovation. I finally found one, Justin Hicks, who now works for me, but I interviewed a lot of people and I always remember one of the economists I interviewed was from one of the local universities here a few blocks away, I won't say who they are, specialized in trade theory and I said, oh well what do you think of new trade theory? I'm not familiar with that. He was being taught a few blocks away here, trade theory and never ever even got exposed to what new trade theory was. Yeah, it's as though you're teaching the Copernican, I mean the Ptolemaic theory instead of the Copernican theory in class. Well moving away from theory to narratives, I think that most politicians and journalists, they don't understand facts as free-floating things, they have to be incorporated into a story. And there are a few stories that are just told over and over again and this is how people organize the world. We're storytelling animals and so I just want to go down a couple of stories that I think shape our understanding of innovation and manufacturing and get your take on them. One of them, and you've touched on some of this, it's the idea that we can do all of the R&D here and all the innovation here and then just delegate the production to other countries. What's wrong with that story? So I guarantee you when anybody brings up that story there's pretty much only one firm that they will talk about and that's of course Apple. Now I want to explain the Apple story in a second but I also want to say Apple is really very, very much the exception rather than the rule here. So what's wrong with that story? As I had a senior executive in my office a couple of months ago from a thing called Etree, the Industrial Technology Research Institute of Taiwan. Which is an interesting story by the way. Taiwan and Korea after World War II were not doing very well. We saw them as kind of bulwarks against red China communist takeover and so we actually funded what became Etree. The U.S. government funded that. We also funded the Korea Productivity Center and the Korea Innovation Center. So it was U.S. money that actually helped both of those countries become global leaders. But in any case we helped fund Etree. One of the things Etree did in the 70s is that you know there's this thing called Semiconductors. We kind of got to get in that game. We don't really know anything about it. So let's go find a semiconductor thing to buy. They found RCA. RCA was like oh yeah we can make a boatload of money if we sell you all our semiconductor IP and we'll get into something else which they did which was bankruptcy. They sold Etree this stuff and Etree was making just really low end commodity chips for a long long time. You know and they're like hey you know what well and then they were pouring R&D money into this government funded research and they worked their way up, worked their way up, worked their way up. And then they started going to American OEMs and saying yeah you know we can... Original equipment makers of computer. We can make this for you. We'll make the motherboard. We'll make this. We'll make it. Oh yeah we can style assemble this for you. Oh by the way we now know we can do a little chip design. Would you like us to do some chip design? And then all of a sudden you have Acer and you've got companies who are competing directly against American companies. And American companies in some cases became a shell of what they were. So that's really the problem Michael. It's not these other countries and the companies in them are stupid. They're not like we're going to sit here and be commodity producers. Once you begin... There's a wonderful Clay Christensen at Harvard Business Group who talks about where the threats come from for leading edge competitive. And where they come from are companies that are willing to go in at the bottom end and take the low margin stuff. And then companies are going oh they've taken the low margin stuff those suckers. They take the low margin stuff. They gain advantage. They gain market share. They keep moving up, keep moving up. And eventually the big companies like Surprise. So the Apple story by the way just to be clear. This is one of those things. I really wish people would actually read the study and read it in total completion where all of this stuff about oh Apple gets all the value, China gets none of the value. That's a study by a guy named Ken Kramer who's an affiliated expert of ITIF. It's a very good study but people don't really read the study. And what the study shows is actually about half of the value that's described to Apple is actually in the retail chain which we would get no matter what. If we were buying foreign computers and they were being sold or we would get that value because you have to have retail distribution. So you can't count that. The other big part of the value chain in the Apple story is it's the inputs, the screens, the certain types of semiconductors which are principally made in countries like Taiwan, Japan and Germany. So yes, don't get me wrong. Apple's a great company. We get a lot of value out of them but they're really the exception rather than the rule I think. Well another one of the narratives that we hear particularly in election season is that the source of innovation and also jobs is small businesses. And just we have to shower subsidies on small businesses, eliminate regulations for them, treat them favorably. The data doesn't necessarily support this obsession to use a Bhagwati's term fetish about small businesses does it? Yeah again this is one of those things that really when you think about sort of the intellectual construct of these U.S. debates it really is striking how an idea can get in the mainstream and it's almost impossible to kill the idea. And that idea about small businesses since she came from a MIT business sort of economist named David Birch back in the early 80s. And David Birch wrote what became an iconic study and it said small businesses are responsible for two-thirds of all new jobs. Now, but Armington and Odle and others wrote was actually it wasn't small businesses it was small establishments. So the Exxon station on the corner, the McDonald's, the Domino's Pizza Chain. It wasn't small businesses it was small establishments of large corporations. So when we just looked at small establish small enterprises that were small businesses like ITIF, New Merit, we actually account for just a slightly bigger share of job growth than we account for in all jobs. So we're not small businesses don't produce more jobs than large businesses by and large. That's point number one. Point number two, if you look at as we do in the book, there are a number of factors. Who pays higher wages? Who tends to have retirement policies? Who exports more? Who does more R&D? Who patents more? Who has higher productivity? Big business, not small business. The best area where small business beats big business is they pay significantly higher workers comp costs. But there's another more serious problem with this fetish on small business that we saw two nights ago in the debate and that's there's a wonderful 60 minute story a few years ago where Sam, no Scott Pelley goes into Newton, Iowa. Newton, Iowa is where Maytag had this giant factory for decades and decades making washing machines I believe. They moved that to Mexico and Scott Pelley's in Newton and he's talking to a lot of small companies like this guy who has a men's clothing store and a pizza parlor and he's just blaming banks what wrong with American banks that they won't fund these small businesses to get off the ground or to get back on their feet. It wasn't a lack of capital. It was a lack of customers that these businesses were suffering from. In other words, when you lose six or seven thousand jobs in a little town where they were bringing money in that they then spend at clothing stores, it doesn't matter if you give these companies money they're not going to have customers. So the point is what really matters to the U.S. economy is our traded sector. This is another neoclassical economist refused to distinguish between non-traded and traded. It really fundamentally doesn't matter to our pizza industry or to our haircut industry or to our massage therapy industry. What we do, what matters is fast growing globalized companies are those competitive and growing in the U.S. If they're growing then the rest of the economy works. If they're not which is what's been happening the rest of the economy doesn't work. So it really is sort of depressing that there's this it's almost like you cannot talk about the economy without singing the praises of small business. Well the final narrative I want to raise with you before we go to discussions is this one tends to be among the friends of manufacturing among people who would share many of your views but it's the idea that there's one magic bullet one dial or knob that you can turn that will solve this problem. So if you pass a bill you know challenging China currency manipulation that then that will fix the problem. You know if you fix the corporate income tax it's some kind of panacea and you use the term in your presentation and I assume in the book of sweets of policies by other governments and could you elaborate on that just so there is no single one two or three things that can be done overnight to offer the situation. Exactly right. I mean we have what we call in the book the four T's which you got to get right trade policy principally going after unfair innovation trade practice tax policy which I'll come back to just in a second technology and talent the four T's you got to get all four of those right and we're not getting any of them right as it stands right now. I think there's a brilliant to me disturbing view a disturbing conception of what what we need to do fostered by some in industry in particular which is if we just simply got government out of the way you know let's just drill for some more oil let's just you saw the Washington Post article this morning on tort reform just cut some corporate taxes that there would be this renaissance of US manufacturing only one big problem with that you look at a country like Germany where they are totally out competing us in manufacturing all the state of show that output growth job growth their wages in dollar denominated terms are 40 higher than American wages so you fix all of these other problems you might you get best get half of that delta you might you might get a 20 percent reduction in cost at most you've still got 20 so we problem note this notion somehow that we're just US companies are really really good we just we just are burdened by this problem is really fallacious and here's one of the reasons why that's the case one of the points in the book we point out is that one of the 20 factors the US and the Britain had in common was essentially a corporate culture driven by the finance industry that demanded short-term profits that is not the case in Germany that is not the case in Japan they are not under the gun to get quarterly returns they're under the gun to get moderate term returns so there's a study done by the business roundtable that isn't that that socialist group here the left wing business roundtable that surveyed 400 CFOs of major US corporations and asked them how many of you would cut your research and development this quarter in order to meet Wall Street's expectations 80 percent said they would cut their R&D to meet next quarter's earnings targets you don't see that in Germany you don't see that in Austria you don't see that in Sweden or Japan so there's notions about we just sort of do a little teeny piece it needs to be a much more comprehensive solution than that well let's turn to a discussion with questions from the audience would you please wait until the microphone has arrived in your vicinity and identify yourself up here second row hi my name is Valerie with sanny embassy of Austria you mentioned Germany before and also Austria and Finland so I was particularly interested if there anything you think the US could learn from these particularly smaller countries like you know Switzerland Austria Scandinavia yeah I mean one of the problems we have is that whenever you Germany's a little bit different whenever you say you know Finland's doing this great stuff or why Austria is really really good you're just dismissed because oh well these are small countries you know sorry the challenge of making a highly competitive industrial economy innovation economy is no different in a small country than it is in a big country so what we can learn from those countries I think is several things one is those countries largely are willing to take big bold steps so you take Sweden for example Sweden actually Finland's have even let me do Finland answer quickly in 1991 and two when the Soviet Union was collapsing the Finnish economy collapsed and it declined twice as much as the US economy did in the in in our great respect twice as much twice as big a GDP loss what did they do they didn't have some debate about austerity and stimulus what they did is they in the midst of a big budget deficit they cut their corporate tax rate about 10 points and and they dramatically increased their investment in new technology and government support for research and then they went and they cut other spending look at Sweden for example Sweden just announced last week that it was cutting its corporate tax rate from 28 I'm getting the number slightly wrong but around 28 to around 22 percent because they realize they've got to be more competitive they're also announcing very very shortly a new national initiative on science and technology where I've been told will also incorporate big investments a big increase in government investment but specifically a country like Germany or Austria one of the things we could learn is that they have a very very good apprenticeship program that companies are all bought into 30 percent of Siemens employees new employees in Germany are apprentices who have a BS in engineering and think about that that's striking another thing we could learn from Sweden from Switzerland for example is a patent box you now have six European countries that tax income from intellectual property at a rate of approximately a half to a third of normal income I mean again Austria I'm sorry Sweden Netherlands Belgium UK big big dramatic incentives and innovations and changes and we're just again sitting on the sidelines so there's an awful lot we can learn from other countries now that's not to say that we're going to do everything the same as other countries we're different we have a different political term but again going to the other extreme that there's nothing we can learn from other countries because we're unique I think is equally a fallacious mistake other questions hi Chris Morehouse GAO one thing I haven't heard addressed this morning is how would you respond to like Tyler Cohen his assertion that innovation may have reached a plateau that current innovations represent refinements of existing technologies that we don't have the kinds of innovations anymore that will generate mass employment thank you yeah so Tyler and I debated that point and I think what Tyler is conflating is the American stagnation on innovation with with world stagnation and I think the more accurate story is not that we don't have innovation but that the United States is not performing as well as it used to if you look if you look at for example and one other piece of that I think is I was on a panel with Clay Christensen recently and Clay made this point which I think is absolutely right if you look at where US corporations are investing they're very very cautious they're investing largely in incremental innovation we're the only country that we could find of when we found data on this if you look at the change over the last decade and where corporations invest their R&D so think about a pie with three slices basic applied and development and basic and applied are going to be more breakthrough bigger bigger risks bigger payoffs the US is the only country where the basic and applied pie slices have gotten smaller other countries were either stable their companies were stable or they expanded so I think the issue really is more about the US there's an amazing amount of innovations that are still going on the genetic sequencing there's there are in clean energy innovations that are happening I think people are still underestimating what's happening in IT or probably it's just because we sort of you know we still have smartphones and they haven't you know although the apple five is or six or seven whatever it is is nice but yeah it's not it's not as dramatic as apple one you know the five but again if you look at some of the big changes in IT I think things like big data things like transforming our health care system through IT you can go to countries where they have hardly anybody uses cash anymore they use their cell phone for for money we don't do that in this country so I really disagree with Tyler I think that there's still a good share of innovation that's possible and is going to happen the real question is are we going to be at the leading edge of it or not well in connection with this I'd like to ask your thoughts on the idea that particular technologies go through life cycles or stages of maturation and you may have an infant technology here an adolescent went there a mature one and maybe a senescent one over here that's just become kind of commodity production and that was my one quibble with your indices in your presentation about the decline of venture capital because it seems to historically venture capital tends to be most important at the infant's breakthrough stage you know 1900 when you have hundreds of little tiny car startups and and you know tech startups in the 90s and as you get because these are high value added increasing returns to scale industries you get consolidation in big companies then the baton has passed from the venture capitalist to a large degree to internal financing by by the companies through through retained earnings yeah no my I absolutely agree it is you were kind enough to cite a prior book I did on on long waves of innovation and I think that's I fully agree with that that that innovation go through cycles and at some point we're going to be in the Tyler Cowan world I just don't think that's right now I think the Tyler Cowan world which is essentially stagnation of innovation waiting till the next big thing happens I don't think we're there yet I as a planet I think we're still 10 years away from that and I fully agree with with you Mike on that point about venture capital but again if you look at other countries they are venture capital increased is this private or private private venture capital so I think there are still a lot of opportunities what we have failed to do in the US think about where the world think about where America would be if we after 1987 had kept on the same path of growth of government support for science and research that we had prior to 1987 so just just think about that as a share of our economy we were growing at this rate from 57 to 87 corporate r&d was growing at this rate corporate r&d continued to grow at this rate until about five years ago we are we're about 110 billion dollars short at a federal r&d in other words a massive amount think about where the US would be if we had been investing 110 billion dollars in r&d every decade every year for the last 15 years more than what we were doing today and we had good policies to transfer that technology out into the market I would submit that the venture industry would be in a lot better shape than it is today yes other questions is this on Rachel Bishop American Chemical Society very interesting I appreciate it was wondering if you'd talk a little bit about the the qualitative difference between American innovation and Germany's innovation I'm hearing one of the things that that we oftentimes are talking about about breakthrough innovation but I'm wondering if there isn't a value in some of the things that are not game changing some of some of the intermediate innovations that maybe we're missing is one area that I'd love to hear about and the other question that I have is why do we keep talking about small business and big business as separate things small business has to sell to somebody they sell a lot to big business why why don't we make this connection in our our public discussion thank you okay Rachel yeah with regard to the first question you know one of the reasons I think this well there's two possible explanations for why our narrative has not been becoming more of a dominant narrative one is we're simply wrong that's certainly in the realm of possibility but the second is that there that that it's hard to hard to conceive that the US is not a leader in innovation and I think there's two reasons why that's hard for three reasons why it's hard to be one we're just so big so if you just look and say well you know let's count up some innovations we're going to get a lot of them because we're so big you know you compare the number of innovations coming out of the US with the number coming out of Finland and we totally just kick their ass we are you know we produce so much more innovation than Finland we're also 15 20 times bigger than Finland that's number one number two is we don't distinguish between companies and countries US companies are still very innovative ge apple intel that's not what matters as much what matters is companies enterprises excuse me establishments so while US companies are innovative they're doing less high value added production and less innovation in America US corporate R&D grew 2.7 times faster overseas in the last decade than our corporate R&D grew in the US so that's what and the third problem I think is that to be fair one area where the US does pretty well is science-based innovation and we get that we're a more entrepreneurial country than we're certainly more entrepreneurial than the Germans we're much more entrepreneurial than the Japanese so we have this ability to take science take big risks and come up with new companies I absolutely get that and that's a great strength the problem is that science innovation is not enough to succeed anymore and this is I think a big mistake that people make when they advocate for policies they say if we just expand our science funding we'll be good to go the problem with that is science is a public good you read about science in a journal you can read the same journals in Taiwan as you can read here again I go back to my my itry official one of the things he was complaining about was just hilarious to listen to this this official he was complaining that the university researchers he worked with focused too much on basic research wow could you move to our country and say that and the problem is that the US system what the Germans have over us and what the Japanese have over us and the Koreans is they have a great engineering system they have a great engineering culture we've really lost that engineering capability and again you can't be as big as us I mean if we were Denmark maybe we could just be the science-based but being so big you have to have the strength in science and engineering so one of the things that the Germans do that's also another thing by the way the Germans are great on a lot of things you've never heard of because you don't buy them they're intermediate products that go into there are certain types of chemicals there are certain types of inputs you know we again we see the iPhone we don't we don't you know how many people take in their iPhone apart and go oh I see that little product has a made in Germany thing on it so it's hard to see a lot of that stuff because a lot of these other countries are great you look at Japan for example there's a McKinsey study on this it showed Japan leads the world with over 70 global market share on over 70 high-tech industries 70 global market share now we don't really know what most of those industries are because they're things like lasers I don't know whether they're lasers but they're things like lasers you know they're things we don't sort of see so I really think one of the most important things we could do is really start to beef up our engineering capabilities we produce fewer bachelor's of science engineers than we did 25 years ago even though overall bachelor's degrees have gone up about 40 or 50 percent one of the ideas that we've proposed is creating essentially a 21st century Morrell act Morrell was a senator from Vermont Michael you make this point about all the good things we did in the in the in the 1860s because we didn't have we had a government who was we didn't have the south in the Senate yes I was trying to say that you said it I for four years exactly and so we did all these amazing things we built the transcontinental railway system we passed the Morrell act the Morrell act created the land grant schools you know probably one of the most important things we've ever done in our country's history our argument is we need a 21st century Morrell act we've called for the creation of 20 U.S. manufacturing universities universities that would be designated you know like Lehigh for example or Carnegie Mellon or Purdue whatever really focused on expanding engineering capabilities getting their business schools to integrate with them and like so we got to we've got to get a much better capabilities on those sorts of things I think another thing we could do there would be to expand or excuse me not expand to create an investment tax credit we need to reward U.S. companies that invest in new machinery equipment and software in the United States now if you talk to some of the neoclassical economists I've I've listed in the thing they will say there is no market failure for capital equipment investment companies gain all the benefits and the market directs incentives properly in fact what's really interesting is what you find in the last decade is that there's a really rich array of scholarly literature that says that when a company buys a new machine it actually doesn't get anywhere near all the benefits from it the benefits flow through to their competitors who learn about it to their suppliers to the workers who know how to use it and then move on to a new firm and companies only get about half of the benefits when they invest in new machinery and equipment they get all the benefits when they invest in a new building there's no spill overs from buildings but they're big spill overs from equipment and software so why don't we treat equipment and software the same way we treat research and development expenditures which is a tax incentive a tax credit so I think if we did those sorts of things and really focused again on engineering and investment in machinery and equipment and software we could really do quite quite quite quite well one of your four Ts was trade and and since nobody's asked the question I'm going to follow up on this Martin Wolf the Financial Times columnist says that mercantilism that is a national policy of running perpetual trade surpluses and in high value-added merchandise can only work if you have what he calls a patsy another country like the United States vis-a-vis Germany and Japan and China which will agree to run perpetual trade deficits the system of mercantilism cannot work if every single industrial country wants to run a 10 5 or 10 percent trade surplus with the rest of the world right and you know that's one of the arguments that well if if competitiveness is defined on the model of these foreign mercantilist trade surplus countries then doesn't that lead to beggar thy neighbor trade wars you know protectionist blocks all of that you mentioned the Indian preferential market assets agreement would you comment on the idea that you could have a kind of mutually assured destruction non zero sum system where you would exploit the economies of scale that you get in global corporations which may very well be more efficient than purely national ones but by having local content because that's essentially what that is if i'm not mistaken essentially local content rules so you say look it may make sense for there to be two global aircraft manufacturers right or maybe one global shipper you know or something like that but on the other hand as we want at least in regions like europe and north american asia may not be every single country we want a certain amount of the high value added production to be located within this region whether or not you know the neoclassical economists would say would say that and it seems to me that's different from the zero sum approach of of of every single country every major industrial country is trying to corner the market in every industry yeah is it uh it is different um so there's actually a bunch of different points there but one uh a uh was recently i was talking to somebody recently who had been in the obama administration who was telling me about a conversation a few years ago which again the administration completely changed its view here which is good but the conversation essentially went like this if the chinese are willing to be so stupid as to give us discounted solar panels and discounted wind turbines they're the suckers were were the beneficiaries and again this is this is deeply deeply the core of neoclassical economics which is grounded on the notion of consumer welfare the purpose of an economy is to maximize consumer welfare the problem with that view fundamentally is how many of you are consumers you all got to raise your how many of you are also producers in other words how many of you work again you're a producer and a consumer the only people who are not are kids and old people if you want to run an economy for kids and old people keep running a big trade deficit and investors yeah and investors passive investors there you go so anyway so the point is you have to be thinking about the producer side and and you know we can't keep being the patsy but the other part of that michael is i think um we talk a little bit at the end of the book i use this sort of term this yin yang i guess about it if you think about what is the u.s strength compared to say china or japan or even germany if you divide your economy into two groups traded sectors and non-traded sectors we actually have a pretty much the best non-traded sector in the world our productivity is the highest u.s companies spend more but twice as much on it the japanese companies do we have you know crm systems we you know our logistics are you know you go to a hotel here versus hotel in europe it's just you know to me it's striking you are all wal-mart versus their retail we have a great non-traded sector which is why we have high per capita income where we don't have a good thing is we don't have a good our traded sector is losing out china and japan to some extent germany it's the flip side it's their non-traded sectors that they've protected and you know kept from competition etc etc so if you look at china for example china has a thing now they've called their strategic and emerging industries initiative so what they've done is they've identified eight industries that they want to lead the world on it's these these you know these industries with low marginal cost and declining returns increasing returns to scale clean energy advanced manufacturing biotechnology etc the chinese government has committed to investing the equivalent of one u.s stimulus package per year per five years to eight industries so we invested at one stimulus package of which very little of it really went to industry most of it was consumer tax cuts and things the chinese are investing every year in five of those five five stimulus package because they want to get these high value added industries okay they essentially want to take their value added from around six percent to twenty percent so you go and you do a calculation which we did in the book you can see what would happen if the chinese were to succeed with that goal what if they get to that level of value added they would achieve essentially 14 months of growth in other words it's equivalent of over a 10-year period getting 14 months of growth so my argument is that the problem with korea the problem with china the problem with japan and asia overall is their their theory of economic growth is really fallacious we're trying to not endorsing this right what i mean this is the point i wanted to tease out of you that you're not endorsing their mercantilism no i'm not i'm not i actually think that they are making a mistake because if you look at china indian's an even better example the rampant amount of overmaning and and just invisible productivity in their non-traded sectors again there's a great mckinsey study uh the bill louis did in a book called the power productivity looked at japanese industries and compared with 100 being the benchmark against us most of their traded sectors were like 120 130 140 their auto sector 140 their steel sector 130 their retail distribution sector 45 their medical industry 50 something like that so again these countries have gone down a path that's all about high value added we're going to export export export and that to me is the biggest that's what we need to be telling that should be the washington consensus not so last point michael i don't have a problem with these at the same time with these countries wanting to get more high value added stuff but i do have this sort of i don't know where it comes from this kind of view that maybe we should all play by by some rules you know china joined the wto and in the wto you're supposed to not discriminate if they'd signed the gpa the government you're not supposed to do force technology transfer you're not supposed to do joint force joint ventures so i really want china to get rich i i want india to get rich i don't want them to get rich in this particular way so if they want to do that through you know getting really great frownhofer institutes in china go for it beautiful outcompete us we it's our then it's incumbent upon us to put in frownhofer these are these industry university institutes they want to do it by a better r&d credit so i think there's a way michael is competing that essentially raises everybody's game forces us to compete in a good way forces them to compete even more more innovation that's what i think we should all be striving for but what they would say is that we cheated all the way until 1945 and now we're changing the rules one more question and then dr atkinson has some books if you're interested to that we can sell and he can sign final questions thoughts comments hi i've never spoken into one of these before i'm brian webster middle east institute you mentioned that our trade imbalance was affecting our savings rate i think i know where you're going with that but could you flush that out a little bit more so there's this notion i mean this is a this is essentially um if you look at what it is our savings rate is and the amount of money we invest it has to be equal to trade imbalance because it's an it's all an accounting equation so therefore in other words let's just say so so we're investing a lot in housing we don't have the money where did that money come from it turns out that money came largely from the chinese so there's actually a one-to-one correlation of the growth in housing investment and the growth of the chinese trade deficit one-to-one so in other words we give them excuse me they give us dvd players they give us assembled ipads they give us toys whatever the chinese export to us and we give them a piece of paper with a president's picture on it okay so essentially it's a very perverse system if you think about it we have we have a per capita income that's perhaps seven times more than the chinese and we're loaning them money excuse me they're loaning us money so what happens is that money comes in and then people think okay well it's coming in because we there's no way we can finance our trade def our excuse me our investment so if we could we we wouldn't we wouldn't be having to import all this money the problem with that is number one let's just say hypothetically that we don't run a trade deficit anymore and the chinese and you know other countries don't export all this money to us and these goods and then and have all this money and so we have less capital so there's there's a there's a reduction in the capital supply we have to somehow you know we got to find out more how two things are going to happen one is we would have spent less money on houses so the demand for capital would have gone down but number two is the price of capital would have gone up in other words interest rates would have gone up and i think this is where neoclassical kind of miss miss kind of the most fundamental thing that they the one thing they're really good at uh is understanding supply and demand curves and if prices goes up uh supply should go up so why do we none of us save anymore because you make less than a quarter of a percent interest so if we don't have all this money flowing in from overseas we will have more savings so the notion somehow that there's this that there's no response in the marketplace i think is fallacious number two one of the reasons we don't save as much is because so many workers are losing their jobs and going into lower wage jobs if the economy was healthier we would have more savings so i think again another good example that if you look at if you remember that graph where you saw in the 90s where the trade deficit was exploding back in the 90s you would have the peterson institute and a whole set of institutions in washington that abided by the washington consensus who told this story which was if we just start running a trade a budget surplus the trade that the trade deficit would go away because those two things are linked right it's almost mechanistic if we just saved more by definition we will stop importing now what happened was we actually ran a huge budget surplus unprecedented and the trade deficit actually never made any sense whatsoever that if we saved more than we would export more that the cause and effect obviously was crazy yeah and the other way to think about that let's just say hypothetically that we decided to increase corporate taxes to 75 percent in the neoclassical theory that has absolutely cannot have an impact on our trade deficit because it's all a function of savings rates so you could hobble us corporations we could put in place a rule that says every major factory in the us has to has to put in five massage therapists for every worker and you could sort of increase their cost by double you're not going to have any effect on the trade deficit because it's all about savings so that's kind of to me the mech the mechanistic fallacy that they have it just it's no sort of real underlying relationship to real enterprises real producers in real competition and that goes to this overall I think failure of neoclassical economics is neoclassical economics is all up here I remember if you somebody if somebody asked a question about Tyler Cowan's recent book The Great Stagnation well the new stagnationist article is by Robert Gordon it just came out a week ago and Robert Gordon's one of those guys when it's like when your watch is broken you're you're correct twice a day Robert Gordon for those of you don't know him an economist he was he was the number one naysayer of the U.S. productivity growth miracle in the late 90s it wasn't real it was all nonsense and after about eight years of evidence staring him in the face saying that perhaps he's wrong he recanted and said I'm wrong but he was just kind of waiting for productivity to go down now he's like I'm back productivity to failure and so the problem is when you talk to people like Robert Gordon or other economists like that and you say have you ever been in the latest factory that's deploying the most automated automated control systems no have you ever looked at sort of what's the most coolest ERP systems in the world that are being deployed in U.S. companies no I do know though what our interest rates are I do know what our savings rates are in other words the problem with neoclassical economies is they're operating up here they really need to operate here what was going to make or break the U.S. economy is what our what our organizations do in other words what our government organizations nonprofit organizations and private organizations do if they are really productive if they're really innovative we're going to do great if they're not we're not going to do great now all of these things circling around up here interest rates deficits yeah those have some there's an arrow that's dotted and it goes around and eventually makes an impact but it's not really the central thing the central thing is much more about what are we doing to make this ecosystem for our organization's work and we're not there the book is innovation economics by dr robert atkinson and steven isle it's on sale outside please join me in thanking dr atkinson thank you all