February 12, 2008    Volume 15, No. 3

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NIST Senior Economist Gregory Tassey: U.S. Economic Prosperity Is Being Hijacked By 'Apostles Of Denial'



BY RICHARD McCORMACK
richard@manufacturingnews.com

U.S. policy makers are beholden to "apostles of denial," and are not addressing the realities of a U.S. economy that is in long-term decline due to the loss of leadership in technology, according to the chief economist at the National Institute of Standards and Technology.

"Unfortunately, while trends indicating declining competitive positions have been identified and proclaimed by an increasing number of analysts, they nevertheless continue to be rejected or minimized by an even larger number of other analysts or policy makers," writes NIST senior economist Gregory Tassey in a book entitled, "The Technology Imperative."

The apostles of denial are "befuddling" the debate and are blocking an effective U.S. response to the growing competitive challenge. They successfully argue that the federal government has little or no role in the development of industrial and generic technologies that generate wealth and jobs. They cite economic indicators such as productivity growth rates that are no longer valid. They have not acknowledged basic economic facts pointing to economic decline, such as the growing and massive U.S. trade imbalance in the important advanced technology sector. They propagate a vacuous debate over "corporate welfare" and "picking winners and losers" and have led the country into a painful economic era.

"To the degree that the decline in competitiveness is recognized, refusal to act is rampant," writes Tassey. "Those with a stake in the status quo and their defenders in government argue for old models of competitive strategy and economic growth. Specifically, factions with vested interests in economic assets such as physical and intellectual capital, existing labor skills, or simply a fear of the trauma and the cost of change, resist adaptation. This is the installed-base effect and it is widespread."

Countries, rather than private companies, "are the growing factor in determining the basis for competitive advantage," writes Tassey. "Because this principle is not yet accepted in the United States, studying, understanding and formulating strategies and policies to address long-term needs of a large, technology-based economy are being short-changed."

The apostles of denial have failed to recognize the negative economic impact caused by the loss of high tech supply chains and chronic under investment in R&D. "History shows that resistance to adapt to changing economic conditions is built into the very factors that led to success," writes Tassey. "Thus, most former economic leaders experience sustained periods of inferior economic performance which persist until economic conditions become bad enough to force a change."

U.S economic performance is struggling with two fundamental problems that portend serious constraints on future economic growth. "First, the U.S economy has lost its perspective on what drives growth," writes Tassey. "Excessive consumption fueled by accumulation of enormous debt precludes sufficient aggregate investment. Second, what investment is occurring suffers from serious compositional inadequacies, in particular, inadequate rates of investment in technology, especially breakthrough technologies -- the ones that create new industries and thereby provide a large number of high-paying jobs."

In an interview, Tassey says: "If you care about the U.S. economy and its future, you have to worry about what we are not doing," which is investing in the technological infrastructure of the country. This lack of investment is occurring at a time of a major technology transition, as exemplified by the semiconductor industry where there is a transformational shift to nanotechnology. "Every time you go through a major technology cycle shift, the role of the technology infrastructure changes and it requires new investment strategies," Tassey explains. "The industry is aware of this -- they have their roadmaps -- but the investment has to be done in the world of global competition -- it has to be done consciously and aggressively."

But that is not happening in the United States, which has steadily lost share in the global semiconductor market. "Governments are now more important in determining where investment capital flows," says Tassey. "We are at a critical time for semiconductors as we make this transition to a new technology cycle. If we don't step up during this transition, then we're going to lose the semiconductor industry."

Global competitors have embraced a public-private technology-based growth paradigm. "No single economy has to surpass the leader to cause erosion of that leader's position," writes Tassey. "Rather, the determination of multiple pursuers to catch up to the United States is collectively taking significant chunks of the U.S. share of one technology-based market after another. This piranha effect, in which each competing economy bites off a piece of the leader's domain until collective convergence has occurred, eventually leaves the leader at best as one of several competitors in markets it once dominated."

A majority of U.S. policymakers believe that the United States is in a leadership position and that investment strategies that worked in the past will continue working forever. "When you have this 'installed-base effect,' it can take decades to admit that you have structural problems that need to be changed," says Tassey. "Look at the Europeans. They are slowly beginning to change, but it's painful for them, and we're going to have to go through the same process. Unfortunately, we don't have the internal policy mechanisms to generate the analysis of the challenge. Industry and academic groups have argued for new strategies and policies but these proposals are based at best on limited analysis and data and at worst on anecdotes and assertions."

There are occasional studies, like the Council on Competitiveness's "Innovate America" project, which are useful. "But the problem with these ad-hoc exercises is when they are done there is no follow through," says Tassey. "That is what worries me. There is no process."

In the 1980s when the United States had to confront a competitiveness challenge posed by Japan, the Department of Defense stepped in to fund Sematech and create large private-public technology and process innovation programs aimed at commercializing technologies. At the time, the defense sector controlled the direction of technology, but DOD has shifted its model to buying commercial technology. "That system no longer exists," says Tassey.

"Basically, I set out to destroy the 'black box model,' which says technology magically appears and therefore all the government needs to do is fund basic research," says Tassey. "It's okay [for the government] to fund some technology research if there is a social objective, so long as the social objective is anything but economic welfare. What we don't understand is that we can't depend on a few large companies and their research labs the way we did in the days of Bell Labs, GE, Xerox PARC and Sarnoff. Those days are gone and if you look around the world, you see more governments use proof-of-concept research built around the technology cluster model. Policy makers in the United States need to understand that is where the world is going and if we don't pony up we're going to be left behind. Europe took decades of sub par growth to finally wake up, but the jury is still out on us."

QUOTABLE:

"Global competition is not only lowering growth of the standard of living at the national level, but it is creating an increasingly skewed distribution of wealth. This pattern is ominous for two reasons: it reflects the declining competitiveness of the majority of workers and such distributions inevitably lead to social and political unrest. As real incomes become stagnant or even decline, anger rises, people become polarized and adopt 'us versus them' attitudes. This 'good guys and bad guys' mentality results in social and political gridlock, which in turn, prevents consensus solutions to the main problem -- sluggish economic growth."

-- Greg Tassey, senior economist at NIST, in "The Technology Imperative," published by Edward Elgar Publishing Ltd. 2007 (ISBN 978 1 84542 912 6).



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