Robert Atkinson on US-China Competition and Industrial Policy – #45

Steve and Corey talk with Robert Atkinson, President of the Information Technology and Innovation Foundation about his philosophy of National Developmentalism.

Steve: Hey Robert, it’s great to have you on. I’ve followed your work for many years. And so, I feel like you’re one of the most sane voices on US trade and innovation policy, et cetera, et cetera. So, it’s great to have you on our podcast.

Robert: Thank you.

Steve: Okay. Our guest today is Robert Atkinson. He’s the Founder and President of The Information Technology and Innovation Foundation, which is recognized as one of the world’s top think tanks for science and technology policy. Robert’s books include, Big is Beautiful, Debunking the Mythology of Small Business, which was published by MIT Press in 2018. And also, Innovation Economics, The Race for Global Advantage, which was published by Yale University Press in 2012. He has conducted groundbreaking research projects and authored hundreds of articles and reports on technology and innovation related topics, ranging from tax policy to advanced manufacturing productivity and global competitiveness.

Steve: He has testified before the US Congress more than 30 times. Robert has served as co-chair of the White House Office of Science and Technology Policies, China-US Innovation Policy Experts Group. As a member of the US Department of Commerce’s National Advisory Council on Innovation and Entrepreneurship and on the US State Department’s Advisory Committee on International Communications and Information. He was previously Vice President of the Progressive Policy Institute, where he directed The Technology and New Economy Project. He wrote numerous research reports on technology and innovation policy covering issues such as broadband, telecommunications, e-commerce, e-government privacy, R&D tax policy, offshoring and innovation economics. In short, Cory, all of the most interesting stuff in our complex world, technological economy. So Robert, welcome to the show.

Robert: Thank you. Pleasure to be here.

Steve: I want to focus mainly on looming US-China competition, but before we get into that, I’d like to ask you to maybe describe your own philosophy of what I believe you call national developmentalism.

Robert: Sure. So, when I got my PhD, there was sort of two different camps. There was the camp that economics was a science and there was a camp that economics wasn’t a science. The camp that economics is not a science, it’s simply the same like all social sciences, it’s embedded in the systems where it’s embedded in the how we frame things. And so, what our view is, that Mike Lind and I talked about, national developmentalism, is a new way of thinking about economics and economic policy. And that’s different than the conventional view. So, the conventional view, what people would call neoliberal economics or neoclassical economics, which is sort of grounded in this notion of countries have comparative advantage and then the global economy is all about Ricardian comparative advantage and free markets.

Robert: And our view is really different than that. It’s simply to say that, in a world now where many countries are competing heavily for comparative or competitive advantage through active government policies, some of them quite legitimate like supporting research universities and getting more STEM graduates, but others frankly not legitimate like systemic theft of intellectual property and forced technology transfer, to get market access and things like that.

Robert: That really it’s naive for the United States to think that it can thrive without having its own set of policies to win in global competition. And that’s really what national developmentalism, it’s saying we have a long tradition all the way back, really from Hamilton, with the report on manufacturers, all the way through Lincoln and the Continental Railroad, FDR, with some of the new deal programs and even after world war… Even after Sputnik, where you had Eisenhower and Johnson and Kennedy all pushing for us to be able to beat the Russians technologically. So, that’s really what national developmental is all about, is to get back to those roots that we’ve long had, but have abandoned or ignored.

Steve: Now, I think a core assumption within national developmentalism, is that government industrial policy, if well executed, can actually work. And I seem to recall a period, I’m old enough to remember for example, US-Japan competition in the 70s, 80s and 90s. And there was a very strong, maybe a voice originally, maybe among academic economists saying that, Oh, government policies in the long run, just actually going to fail. You’re going to end up worse off if you let government interfere in markets or even in investment decisions. And I personally found that very implausible that it could really be that that way that even good government policy wouldn’t actually help the country. I think we finally gotten beyond that because there’s an example of China actually catching up with sort of huge government intervention playing a role. Can you just comment on how the intellectual landscape has changed, relative to how people view industrial policy?

Robert: Sure. So I mean, part of the problem was that, you had many neoclassical economists. I mean, the famous iconic article was really… Or study, it was by Charles Schultz, who had been on President Carter’s Council of Economic Advisers. And then he was at Brookings and he wrote a really kind of an attack piece on industrial policy. And really, that was the end of it. As Robert Rayshawn said, industrial policy is a concept that went from… It went from a term that went from obscurity to meaninglessness without any intervening or creative coherence. And the reason it did that, was because you had a lot of economists who had this assumption that economies are always in a state of natural equilibrium. And the goal of economic policies, what they would call allocation efficiency. So, in other words, you produce this much wheat and this much steel and this many haircuts and anything that would mess that up, it gets you off allocation efficiency.

Robert: What industrial policy advocates would say, wait a minute. First of all, that’s not the most important goal. The most important goal is dynamic efficiency or productive efficiency. If you distort your economy a little bit in the short run to get longterm gains from innovation, those cost them more than pay off themselves. And secondly, Krugmans worker, in the early 90s about, increase industries within, what are called increasing returns to scale. The bigger you get, the lower your costs, the more advantage you have. Neoclassical economics doesn’t really even recognize that. And so, if you let a company, sorry, a company or a country gain that… We see that now with Huawei for example, in telecom equipment where they have… They’re at least at the level of Ericsson now, the other major player and maybe better. And once you sort of get down that path, it’s easy to just get locked out of advanced markets.

Robert: And so, look, everything would be fine in the United States if we simply didn’t care about advanced industries. If we just said we’re happy to be a seller of, as Hamilton once had said, a drawer of water and a hewer of wood, we’d be fine. We can sell the Chinese our soybeans and sell the rest of the world our natural gas and we’ll be like Canada. But I don’t think really that’s what most people want the US economy to be and certainly we can’t have that, if we want to have a strong national defense.

Steve: I think, among the economists who were against industrial policy, there was maybe a more nuanced statement that if government gets involved in figuring out which research efforts to support and which industries of the futures to subsidize, it will inevitably get it wrong or at least underperform what would happen if you just let, for example, venture capitalists or big corporations decide how to allocate research resources. And I think that doesn’t have to be true. It could be true in certain periods of time, in certain instances. But I think, you can’t have that hypothesis while at the same time saying that, Oh, these Chinese guys by subsidizing Huawei and a bunch of other companies, maybe solar cells and companies that make solar panels and things like this, that they’re going to eat our lunch. So, once you have that recognition that governments are playing a role, then you have to be smart about how your government plays a role.

Robert: Absolutely and it was really, I think, two major points that the other side here on that debate makes. One is that, they have almost a caricature of industrial policy. Like it’s the French picking Minitel instead of the internet. And smart industrial policy or industrial strategy, whatever you want to call it, would never say, Duracell is our battery champion and we’re not going to help Eveready or whatever the battery companies are. Or conversely were saying, same thing with, they say, well we’re going to put all our chips in lithium batteries, but not in magnesium batteries. Government, to their credit, yeah, they’re right. Governments can’t pick individual firms. They can’t even pick individual narrow technologies. What they can and should do is pick broad areas that we know are going to be important.

Robert: So, for example, the US has to be a strong player in semiconductors. And we don’t know whether it’s going to be Intel or maybe it would be IBM or Micron, same thing, for example, we probably should be good in batteries and storage, but we don’t know what kind. And so, I think government certainly can pick broad technology areas and industries. The other component of that, where I really think in some ways only government can pick winners. And that’s the fact that many economists have done studies showing that the rate of return, from the private rate of return and investing in innovation, is usually lower than the social rate of return because of what economists call spillover. So for example, the company that invented the CAT scan, I think, I forget who did this very famous study, the social rate of return of the CAT scan was like a hundred percent a year.

Robert: I mean, it was massive, but the company only got a small share of that. So, if you think about that, then it really only government can pick winners because what you always want to do is you want to align the private rate of return with the social rate of return. And the market, by and of itself, only focuses on the private rate of return.

Corey: Sorry Robert, to interrupt, but my role in this conversation is partly to be what we call our audience ombudsperson. So, I’m going to ask the naive questions. How do you define the social rate of return and how do you measure it? I think people are very comfortable with measuring dollars financial return. But how do you quantify social return?

Robert: Well, again, from kind of an economic model way you would do it, you would say, okay, let’s say, Steve Jobs comes up with the iPhone and they made a bunch of money from it. They made a lot of money from it. But the social rate of return of the smartphone was massive because it enabled things like Uber and Airbnb, essentially became a platform. So, the way you would count the social rate of return is really another way of saying that of, what’s the total economic return to society? How much more GDP did we have because this technology existed. So, in the CAT scan example, that would be all of the health savings from having the ability to scan inside the human body, as opposed to before. So, when you again, look at those studies, what you find generally…

Robert: This was also by Nick Bloom and [inaudible 00:12:09] Stanford and John van Reenen, recently updated a lot of this work and they found that the private rate of return from R&D was about half of what the societal economic rate was. Which suggests that we’re under investing in R&D as a country, both at the basic level at universities and labs, but also at the corporate level.

Corey: Yeah. I also remember these debates about industrial policy, from the 70s through 90s. And I guess, I was probably much further to the left than Steve was then because on my left wing side it was just taken for granted that industrial policy was a good thing and that we kind of saw these free marketeers attack anything that looked like government involvement. And so, it was sort of puzzling to see the other side of win, in the absence of anything that looked like really definitive evidence. And maybe this intersects with the question whether economics is a science because if it’s right that this single paper had such an enormous influence in killing discussion of industrial policy, it looks like economics is not a science, but a highly politicized form of debate. Where one rhetorically, very influential person can shut down research and shut down policy. So, isn’t that something of an argument on the side of the people think that economics is really not a science, the fact that this paper and this movement took over so strongly in the absence of clear evidence?

Robert: You’re absolutely right. I couldn’t agree more. I mean, it was frustrating for me when I see these proclamations by economists, that simply say things like what we talked about. Well, we all know that these policies are suboptimal and what I’ve never found is a footnote. Normally, when academics make a claim, there’s usually a footnote and they’ll say, journal of the X, volume four, page 19 and there’s never a footnote because they don’t… It just to them, it’s part of the overall doctrine. It’s part of their worldview. It has to be right. It would be like somebody saying, well, wait a minute. We don’t believe in supply and demand curves. Well, sure supply and demand curve generally or most of the time they’re accurate. So, you’re absolutely right.

Robert: And what I find problematic about that is economists, but both in academia but also in the policy world, whether, in Washington in particular, I would hope they would be held to… I would hope they would hold themselves to a higher standard of let’s at least be open to having a debate and I’ll marshal my arguments, my facts, my research studies against yours and we’ll go at it. But they don’t do that, generally. And I find that, to me that’s quite troubling. At minimum, they should do that.

Steve: It’s very ironic, Cory because… So, when Corey and I first met, we were in the Bay area, he was at Stanford and I was at Berkeley and it was sort of pre internet boom and these arguments about industrial policy, for example, they were taking place visa US-Japan, competition in semiconductors and maybe automobiles, things like this. And at that very moment, massive government spending through defense and research was laying the groundwork for Silicon Valley to just explode, just 10 years later after we were there. And it’s very clear, I think almost any historian of Silicon Valley would say that none of this would have happened, if there hadn’t been massive government investment in various research projects and defense related projects in that area. So, I think it’s not disputed anymore, but I never heard any economists come back from that era and say, Hey, we were just wrong about this. Industrial policy can work sometimes.

Corey: What’s interesting is that you saw among historians of science, of recognition that say Vannevar Bush was incredibly important in driving the development of science to the US. Now is effectively, not quite industrial policy, but essentially technological policy, educational policy. So… But that recognition didn’t seem to seep into the debate, right? It’s much more broadly funded. People granted that were putting money into really basic industries and that was probably giving benefits. But yeah, it didn’t seem to register concretely in that way.

Robert: Yeah, Corey, I agree with that a 100%. I mean, the problem is technology policy is this sort of intellectual ghetto. It’s something that real economists don’t study. A real economist study… My favorite example of that is if you look at… So, Greg Mankoo has a textbook for it, I’m sure it’s taught and used in many, many econ 201 classes around the country. And he has one 400 page textbook, has one page on innovation and his example is the automatic ice cream maker. So, part of it is economy… As Paul Romer famously said, he was at Stanford and he was at the World Bank, that for most economists, innovation is exogenous. They can’t model, it’s outside them. They don’t know how to measure it. And so, they just kind of ignore it and then assume that everything else works. And your point about Silicon Valley, I always remember testifying at a hearing in Congress one time and about the role of government.

Robert: There was a gentleman who was a big venture capitalist in the Valley and he said, well, all this talk about industrial innovation strategy is making me uncomfortable. I mean, just look at the major companies in Silicon Valley that were born that had nothing to do with the government, Apple, Intel and Google. I said, well actually, Apple was an SBIR award winner I believe or some SBA thing. Google, Sergei Brin was working on an NSF grant to do his doctoral research, without that, he wouldn’t have… Harder to develop Google. And Intel was air force chips. So, you’re absolutely right. There’s sort of almost a willfulness to ignore how the role of government has, actually, played a big deal, played a big role.

Steve: So, now the tables have turned and the US is starting to think of China as a sort of existential threat. And I think everyone agrees that, that’s an economy where the government really does play a strong role in picking or building winners. Maybe stealing technology secrets from us. So, I want to turn to that for our next topic of discussion. Now. I think I saw a report from you or from your think tank, attributing at least, maybe, roughly half of the decline in US manufacturing to trade or maybe trade with China, as opposed to, I think it’s often said that, that decline is mainly due to productivity. But I think you guys looked at this more carefully. Am I right about that?

Robert: Yes. So absolutely. This again, to me, is one of the more frustrating parts of this debate. Again, we should even have an open and honest debate about why did the US lose a third of its manufacturing jobs in the 2000s. And what the conventional economists will say and it’s… I hate to say this, but it is almost solely because they’re afraid that if we have an honest discussion and we find out that half or even 60, 65% of those jobs were lost due to globalization and lack of competitiveness, that Americans would turn against globalization. They think globalization super important, as do we. So, they almost intentionally try to cloud… The answer is, Oh no, it’s all trade. So, our work, Susan Houseman’s work from Upjohn Institute here, nearby, in Kalamazoo, Michigan. For you and a couple of others, when you really look at the data carefully, it’s very clear that most of the job loss wasn’t due to productivity.

Robert: But I can give you many stats on that. But let me just leave you with one. In the 1990s US manufacturing productivity, relative to the rest of the economy, was actually higher than it was in the 2000s and yet in the 1990s we lost 2% of our manufacturing jobs. And in the 2000s we lost 33%. So, higher productivity in the nineties and we lost two, lower in the 2000s and we lost 33 something else that has to be going on here. And that was loss of competitiveness and trade.

Corey: You no doubt, remember the book by Jeremy Rifkin, The End of Work.

Robert: I do.

Corey: And he was that there’s going to be an apocalypse, as regards to jobs, due to essentially, automation. I remember distinctly, reading that book and then thinking, that’s a really exciting prediction. Let’s see what’s going to happen with it. And for a long time it was… I took it as a really good example of someone who-

Corey: And for a long time I took it as a really good example of someone who had clearly gotten something wrong until the job losses started coming into 2000’s. I thought, “Well maybe he’s right.” But I began then looking more deeply, partly from articles that came out of your think tank. And I think there’s some really compelling evidence to make the case that it is in fact competition. So if you could take a minute to go into that because one has to do with factory closures which have increased substantially and likely not due to automation because that should make a factory function better, but would it be likely a casualty of competition from abroad? So our readers are pretty educated and could take a fair amount of data. So if you could lay out the case that it is in fact competition rather than automation.

Steve: Yeah, and I just want to emphasize what’s been said, which is that this is a very essential empirical point to establish. You need to decide what the actual reality is of this before you decided what to do about immigration investment and automate automation trade relations with China, so it’s a very core thing to explore.

Robert: Yeah, I couldn’t agree more and it’s one of those things… It’s so frustrating because the only neutral judge on this, if you will, really is the Bureau of Economic Analysis and the US Commerce Department. So they’re the official referee here. And they publish data, officially US government data on inflation adjusted output for 19 different manufacturing sectors and the rest of the economy as well. So, that’s what you have to measure. Inflation adjusted value added. Because if you don’t measure inflation adjusted then you’re not controlling for all. You want to know exactly how many cars were produced or how many computer chips or whatever.

Robert: When you look at that, what you find are a couple of interesting things. One is, that out of the 19 industrial sectors, these would be things like motor vehicles, textiles, drugs and chemicals as examples. Out of those 19, 15 of them had losses of output in inflation adjusted terms, real losses of output. Even though GDP was growing 15 to 20%. Between 2000 to 2010 these 15 industries were producing less in the United States. But that tells you something.

Robert: Now, why did many of the economists get it wrong because the top line number putting all the 19 together, the top line number says, “Oh no, manufacturing output is growing.” So what was that all about? That was almost all about one industry called the computers and electronic components products, NAICS 337 and that was the semiconductor industry and the way the US government measures output is when each year when we get that new computer chip in our phone or laptop, it’s twice as fast because a Moore’s law, the government records that as Intel or Dell or whoever making twice as many of these things. They’re not making twice as many it’s just like faster processor.

Robert: So when you control for that, which is what we did, and Sue Houseman, a few other people, when you control for that, what you find out is that overall us manufacturing declined, output declined 11% in the 2000s. And all of the growth was due to this NAICS 337 issue. And in fact though that, one last point, we went and we got census data, we purchased census data and to buy it on the actual number of boxes, the number of laptops, the number of desktops that were made in the US and it fell by half in the 2000s.

Robert: So again, when you look at all this evidence, it’s just very, very clear that all of this is a statistical artifact of what’s called hedonic pricing in computers. And when you strip that all out and you find out, “Oh no, wait a minute, we’re really not doing very well.”

Robert: But virtually none of the economists bothered. They just look at that top number and they, “Oh well as a share of GDP, manufacturing is the same as it was.” So it’s true.

Steve: So just to recapitulate that, so X semiconductors, US manufacturing in the decade 2000 to 2010 and also take into account inflation produced 11% less output?

Robert: Yes.

Corey: In the US.

Steve: US manufacturers.

Robert: In the US.

Steve: So, X semiconductors, it’s fair to say there was a significant decline and it’s even larger decline because the overall economy grew quite a bit during that decade. And so that story doesn’t seem to be a automation. Automation would probably let us produce as much or more in those sectors, X semiconductors, not less, right. So it seems like it’s more consistent with factories moving from the United States to other countries so that the output from those new factories in other countries is not counted as US manufacturing output.

Robert: You’re absolutely right. So for example, and I think Corey you made this point also, we lost something on the order of 45 to 50,000 factories. We were losing a factory, I believe it was every two days a factory was closing in America for 10 years. That’s not consistent with a productivity efficiency story. Steve to your point, you would think if companies were being more productive, output would go up because at least in some of these industries, there’s elasticity of demand. Reduce your prices, people buy more cars, you export more around the world. That’s exactly what we see with robot adoption around the world. Countries adopt more robots, their manufacturing output grows faster because they get more efficient.

Robert: One last factoid here, which I think is emblematic of the point. Is, in the United States in the 90s the total capital stock of us manufacturers so add up all their machine tools and their lays and their all that. Add it all up in 1990 added up in December 31st, 1999 it grew 37% in inflation adjusted terms. In the 2000s it grew 2%. so again, that’s not consistent with a rapid productivity story. You’re not even growing your capital stock. The reason it grew 2% is all the offshoring that was going on. So it’s just frustrating that even today you’ll see stories in the paper.

Robert: When when Senator Warren, Elizabeth Warren was quoted something she said about US manufacturing productivity not being the main cause. Glen Kessler, I think that’s how you pronounce the name, in the Washington post, the fact checker, he did a fact check thing on it and interviewed me. And I was disappointed in what he said because to me there was no stretch of there was no, what he calls a Pinocchio in what Senator Warren was saying. She was absolutely right. But you know, Kessler would only talk about, “This person said this, this person said that.” No, it should be pretty clear by now.

Corey: So I think we all agree that the world’s complicated and rarely is it all one thing or the other.

Robert: Correct.

Corey: So have you tempted to quantify the degree to which job losses are due to automation versus competition from abroad?

Robert: Yeah, and I think that’s one of the key things here. There may be some people, I don’t really know them, but maybe they’re saying it’s all trade and competitiveness, competition. We’ve never said that Sue Husband’s never said that economic policy institutes never said that. The other side says it’s 90% plus automation depending on the estimate. You basically, I think most estimates are about 50 to 60% loss due to trade and lack of competitiveness.

Robert: By the way one of the interesting things now, which very few people were talking about we’ve seen this growth of manufacturing jobs now in the last eight years or so. But when you look at inflation adjusted manufacturing output from value added output from I guess 2014 to the present, it’s actually declined. So even now it’s still declining. Well, why are manufacturing jobs growing? The answer is for the first time, probably in American history, but certainly since 1948 manufacturing productivity is growing more slowly than the rest of the economy. Very troubling, very strange. And that’s one of the reasons we’re seeing more manufacturing job growth, because the companies just aren’t being as growing their efficiencies. Now, hopefully that’s going to change with what people call industry 4.0 or smart manufacturing as companies begin to ramp up new technologies. But that’s pretty bad that we’re seeing slower manufacturing productivity growth now.

Steve: It seems to be the opposite in China because I think there are lots of stories about in the cell phone manufacturing lines them being able to do it with almost no people now. So, their sign seems to be in the opposite direction.

Robert: Yeah, the, some of the best work on that is by my colleague Willie Shea at Harvard business school and Willie’s done some really fascinating case studies there. I’ll get this wrong, but I figured it’s the major Chinese, a 4K TV maker the big screen, they’re now one of the most automated, modernized production facility in the world to make these big giant, very small, very narrow and just very, sorry, easily breakable screens and they’re not one of the most technologically advanced. And interesting point, by the way, the Chinese are investing as a government in terms of support for robotics. Probably on the order of 50 to $100 billion a year.

Corey: Why has manufacturing productivity increase slowed so much? And what can the US do about it domestically, aside from perhaps maybe they get into this having some kind of protectionist measures against China?

Robert: Well, I think there’s a couple of reasons. One, there’s a recent study we did, a project that’s been funded by the Smith Richardson Foundation in New York. A year long project we’re engaged in looking at the effect of Chinese policies on global innovation. In other words, innovation outside China. And what we did is the first deliverable was a lit review where we looked at pretty much every single scholarly study, Europe, the US, Canada, Japan, Korea, and what we found certainly in the US was a negative impact on innovation. So it’s hurt R and D in the US. When you’re being attacked by these Chinese firms, your margins go down and you’re less willing to invest in this futuristic stuff. You’re just, you want to defend your current situation. So that’s one.

Robert: The second thing is capital expenditures, as I noted, they’re continuing to be quite low. Companies aren’t investing in new machines, new equipment there, just easier for companies to go put that factory in Mexico or Taiwan or China or wherever it might be. And I think the other component is technological. We do appear to be between these technology waves, if you will. And there’s a new set of technologies obviously in manufacturing, what people called smart manufacturing, the ability to use AI, internet of things, autonomous systems and robotics. That in our view seemed pretty promising. But for most companies, they’re still kind of dipping their toe in the water and not quite sure how to implement them. So that would be a role for government. We’ve argued for this. Government should have a national policy to help companies adopt these smart manufacturing systems.

Robert: One of the ITIF did is we were fairly instrumental in convincing the Obama administration to launch this series of institutes, these manufacturing USA institutes, which we loved. These public private institutes usually hosted at a university, but with industry partnership, we only have 15 of those. And we’re not funding them very well compared to the Chinese. So we should just do a lot more of these kinds of efforts.

Robert: Another program that we were able to get launched through the leadership of Senator Chris Coons from Delaware is a program called Manufacturing USA manufacturing… No, no, sorry. It was called the Manufacturing University. So it’s a competitive program through DOD where universities who have an engineering program who were developed manufacturing engineers or mechanical engineers also work with local or other kinds of industries, can get extra support from the government to expand that kind of work. So there’s a lot we could do, but we just aren’t doing anywhere near as much as we should.

Steve: Coming back to your estimate that perhaps a bit over half of the manufacturing losses are due to offshoring or foreign competition as opposed to automation and productivity gains. Can you estimate what fraction of that loss is actually due to China as opposed to say Mexico or some other competitors?

Robert: Yeah, that’s a little hard to do. But so based on our work and EPI and economic policy and others it’s probably a minimum two thirds China.

Corey: And I recall also that in one of your white papers, maybe it was just a paper that you liked, there’s a suggestion of instituting an R and D tax credit, basically benchmarked on your previous three years of investment. That you’d be able to write off, I think the proposal was 14% of the difference between your current investment, your past investment as a way of incentivizing companies. And you had an argument that this would again would pay for itself, which I think for many people is a very questionable claim for tax credits. But I like to hear you state that proposal. It was pretty concrete and it’s also pretty unusual because you’re a pretty honest guy and as most tax credits don’t pay for themselves. Those tax cuts don’t.

Robert: Sure. So I wrote a book, which you didn’t mention, my book before, the innovation economics one and it was called, Supply Side Follies. And it was a fairly rigorous academic review of the academic literature on supply side, principally tax cuts. And my argument was particularly on the individual side, that they cutting rich people’s taxes, is just all you’re doing is cutting rich people’s taxes. You don’t get very much out of it. I do think, I do think that directed tax incentives for corporate behavior are a little different. And so here’s the logic.

Robert: So, a little backing up. And then in 1992 the United States had the most generous research and development tax credit in the world. We actually developed it in 1981 we put in place the first R and D tax credit in the world. But since then all these other countries that looked at ours, copied it, expand it on it. And now we’re about 27th most generous. China has a more generous one than we do, many of the European countries do, et cetera. So the proposal we had was to expand the current credit. And the logic for the budget savings is as is the following.

Robert: If you look at again, virtually every single academic peer reviewed study, I mean Bronwyn Hall has done good work on this, I think she’s at Stanford. But virtually every study says, that for every $1 of tax credit that you spend, if you will, companies do approximately on average $1.30 more R and D than they would in the absence of the credit. So you take that, you put that in the model and say, “Okay, what does a $1.30 more R and D get you?”

Robert: And there’s a very good study by Al Hannan Heldman at Harvard and Coe, I was to say David Coe, I’m going to get it wrong. And they’ve basically done a very good econometric modeling of, how much is your R and D stock, the growth of the R and D stock? So if I invest a million dollars in some R and D now, it’s worth a lot now, but in 20 years it’s worth nothing because that knowledge is 20 years old. So you have to look at the current stock of R and D. If you expand that by 1% how much does the GDP grow? And the answer is the GDP grows 0.23% so about a quarter of that, if you will.

Robert: You put those two things together and you clear what the R and D credit, how much R and D is going to produce. We can model that in terms of the R and D capital stock for the economy. And then we can say, “Okay, this is how much GDP growth we’re going to get.” And you take 20% of GDP growth, which is more or less the share of the federal budget. And that’s how you get to it paying for itself after 15 years in net present value terms. I think that’s a pretty good number. I’m very confident that’s in the ballpark, shall we say.

Corey: If you were to put confidence intervals on that number, 95% confidence intervals, how low could the return be and how high? What’s our range around what you think is the median value?

Robert: I’d have to go back to the study we did and look because it was four years ago. But I just look rough guesstimate, I’d say you’re probably looking at a rate of return from 10 to 25 years maybe.

Steve: I think Corey coming back to the point made earlier about a social return or an overall societal return from research. I think all the studies I’ve seen placed the rate of return very high, as being very high. Now it’s difficult for an individual to capture those returns, but society wide, I don’t think there’s a lot of debate that well intentioned, well motivated research actually produces huge returns for society as a whole.

Corey: Now this was the inside of Vannevar Bush back in the 40s effectively. I think that I’d just like to get a sense of how wide the estimates are and how we perhaps quantified it. Because many people are skeptics are going to go at the low end and try to set to push it under one.

Robert: Yeah, so just in terms of just the elasticity of demand, if you will, on that. I would have to go back and look, but again, I don’t recall a study, maybe there’s a couple, but out of reviewing maybe 30 scholarly peer reviewed studies and academic journals, the range is, as I recall, is from $1 to $2.70. Now I would grant the two seventies probably high, maybe for a particular country. But to me I think we used a $1 30 in our model. So let’s just say we use the $1. A $1 for $1, instead of the $1.30 sure. You, you’d have a little bit lash, you’d have a little bit longer payback.

Robert: But the other advantage, the other reason to do this, by the way, it’s not just GDP growth, it’s competitiveness and innovation. But one of the things that’s troubling is you see the company now that does more R and D than anybody else in the world on a purchasing power parody basis is Huawei. They spend more than any other company in the world. And unless you really begin to say, “How do we want to tackle that?” Now to be clear, I’m not saying R and D credit’s the only tool in the toolbox. University research grants, public private partnership is a whole set of tools that it’s clear that federal R and D spending itself generates more scientists and engineers and has its own spillover. So I’m not saying we should only use one arrow in the quiver, but I think we’ve got a big problem we should be thinking about using many.

Steve: So I wanted to talk a little bit about mercantilism. So it seems to me it’s rational that when you’re a rising power and you’re trying to catch up with more advanced competitors, that you are going to adopt some mercantilist policies, maybe some IP theft, maybe not completely abiding by the rules. And I think historically the US was guilty of this when it was competing first against the UK and European powers and clearly China has been engaging this kind of practice now. Maybe you could just flesh that out for us right now and tell us what you think are the most egregious practices that they’re engaged in?

Corey: Before we moved to Robert. Steve, audience ombudsperson.

Steve: Yep.

Corey: Can you define Can you define mercantilism?

Steve: Maybe we should have Robert do that since he’s an expert.

Robert: So the definition of mercantilism was from Adam Smith and Ricardo was the hoarding of gold. The reason you wanted to exports is to have the king’s treasury have enough gold, and that’s not really what it is now. Mercantilism is basically this view that the goal of economic policy should be to jack up your exports as much as-

Robert: much as possible using a wide array of policies, that export dominance is the principle goal of economic policy trumping, for example, widespread productivity growth. And this is one of the mistakes the Japanese made for example is they were very good at export. Their export industries were very strong because they were mercantilist. Their domestic sectors like healthcare and agriculture and retail were incredibly inefficient. Oh my gosh, incredibly inefficient compared to U.S. Sectors and the Chinese are following the exact same path. They want to really beef up their export industries. But when you go to China or when you look at the evidence, there are domestic serving sectors like banking, insurance.

Robert: So logistics, incredibly inefficient, but in their mind, the path, the royal road to growth is through mercantilist export growth. So the question is how do you drive up your exports and what we call innovation mercantilism is using a set of unfair practices to gain advantage in advanced industries like electric vehicles or solar panels or machine tools. And what the Chinese have been doing is putting in place a whole set of practices. For example, forced technology transfer. I was reading, I’m doing a little bit of research now on why the U.S. lost, why don’t we have a telecom equipment provider? And so we had the world’s dominant telecom equipment provider in the late 90s called loosened. It was a spinoff of AT&T slash Western electric bell labs was part of it and, within eight rather than 10 years, it potentially went bankrupt. It was acquired by a French company. It disappeared.

Robert: So why don’t we have that? Well one of the reasons is that the Chinese starting in the early 90s, they had an active policy where they made their telecom equipment companies buy from as many different foreign telecom equipment providers as possible. So Lucid, Nortel, Ericsson, Japanese companies, why did they do that? Because in each one of those equipment purchases, they required technology transfer. If you’re going to sell us a switch, you got to tell us how that switch works. So that all went to ZTE and WowWay and it helped them build up their capabilities. Massive subsidies. So for example, right now the Chinese government has a war chest between their provincial and national governments of over a 100 billion dollars equivalent of just to give it to semiconductor companies.

Robert: So there’s a very important technology called DRAM chips, dynamic random access memory, these are memory chips being your smartphone. The Chinese have built the largest DRAM factory in the world, totally paid for them with a government check. Even though we have overcapacity in the global DRAM market with three main companies and they’re building the factory with stolen technology that clearly they’ve stolen it from U.S. Company called Micron. So those are the things that China is doing. And that’s really what our argument is about China. It’s not that we want China to not develop or get richer or even move up the value chain, but they need to do it by playing by the rules.

Corey: Have you attempted to try to quantify the benefit to the Chinese economy of stolen IP or these obligatory tech transfer policies or has anybody else?

Robert: So there was one study done by, I believe it was by the International Trade Commission, the U.S. International trade commission, which is an independent or a government body with commissioners. And I believe it came up with a number of four or five, or sorry, five or $600 billion a year lost to the US just from Chinese technology theft. So imagine now all the other companies around the world. So, we’re talking a very significant amount of money where these Chinese companies know they don’t have to invest as much in R&D. They can piggyback off of our investments. We think about what R&D is, R&D is basically, you and me not buying, not going out to eat this year and instead putting it in something that we’re going to get in the future. And that’s what R&D is, is society saying we’re going to give up current consumption for future consumption. Chinese don’t have to do that.

Robert: So there was another very important study that was published by the national Bureau of economic research and it looked at forced joint ventures in China. And what they found is the more advanced the industry technologically, the higher the rate of joint ventures. And more importantly they found that the joint venture benefits didn’t just go to the partner, the American company partner, but they actually spread through the entire Chinese ecosystem. So yeah, nobody’s quantified the exact number. But if you look at studies like that, it seems like a pretty big number.

Corey: So another question is just analogy, I guess between essentially foreign policy and political and military sense and foreign policy and economic sense. You of course, familiar with the realist school on international relations, which is essentially, it’s international anarchy and countries may, we may have these international conventions. International rules are basically countries going to do what’s in their best interest. And so we should probably dispense with a lot of these niceties of international law. Can we just see the policies that China has pursued is just simply realism? They didn’t do what it takes to advance and we might talk to them as much as we can, but unless we’re prepared to punish them in a serious way, we’re not going to stop it. We’ve got to have some serious enforcement mechanisms, perhaps some trade war type situation or a WTO with real teeth, but otherwise countries are just not going to follow the law because it’s not in their interests.

Robert: I couldn’t agree with you more. It’s absolutely right. My coauthor Mike Lynn wrote a recent piece called, I think it was the rise of geo economics and his argument is, what we are in now is not just a realist world with regard to foreign policy and military affairs, but in economics as well. And you’re actually right, I actually think China could do better if they had a different policy, but I get what they’re all about. They’re not just about growing their economy, they’re about growing their power. And as Orville Schell wrote in his very excellent book called Wealth and Power, and it was history of China. Orville’s analysis is what the Chinese are interested in. Two things. It’s wealth and power and technological advancement is key to the Chinese being able to having global power and they see that.

Robert: So I don’t necessarily think that somehow they’re… I think they’re wrong but, but yeah, they’re going to do what they’re going to do and there’s only two ways to stop that. One is if we had a WTO with teeth, but we don’t. The WTO has shown itself that it isn’t up to the task of dealing with non rule of law countries. So it’s very good study by Mark Wu. I think is… Going to say Harvard law. I think it’s Harvard law school wrote a piece on it. Just exactly why China can get away with it. I’m going to give you an example with WTO to bring a case, you have to have really two things. One, you have to be able to show the law or the regulation in a country. You go to China, they say we don’t have a law enforced tech transfer. Show us the law and they don’t have a law. Everybody knows they don’t have a law.

Robert: What they have is they put you in a room and they say to you, if you don’t transfer your technology, you’re just not going to get access to our market. Or by the way, you’re going to have an inspection. We’re going to shut you down by some regulator in two weeks. Everybody knows that’s the game. The second thing you need is you need private companies to bring cases. Technically the US could bring cases, but historically, country don’t bring WTO cases unless they have a complaint on their side. US companies will not bring WGO cases against China because they know they will be retaliated against. They know that and they will be. So we’ve set up a system for rule of law countries that play by the rules and don’t do these things. China doesn’t do that. So it makes it harder to go with the WTO.

Robert: So just to finish up on that, that’s our argument is what we really do need is a much more robust global Alliance. Europe, Japan, the US in particular, where we use our collective force. I don’t mean military force, but economic force, diplomatic force to really push back against China and these are egregious policies. I think if we do it right, we can reduce some of their policies. As a George Kennan one said that, the job of us with the Soviet union is not to overthrow the Soviet union, but to roll them back a bit. I think that’s the job with these Chinese policies to roll back them, take off some of the rough edges.

Steve: So I think this so-called the containment policy, I guess that’s what Kennan originally called it. This is a containment policy in the economic realm. We’ll be challenging for the US because on the other side of it, China will be trying to peel off competitors from that coalition and say, “Hey, we’re going to…” South Korea is a good example. So they can convince the South Koreans, “Hey, you’re right next to us and we’re going to win anyway so you should defect from this coalition and just play with us.” I think that is the game that we’re going to see unfold in the coming decades.

Robert: I totally agree. And not just that, but back in the, you recall from the cold war. There were so called unaligned nations and that’s also the big battle. That’s the Chinese belt and road initiative is. Where’s Africa going to come down and we’re in Latin America going to come down on that? We’ve abdicated that role. We should be out there fighting every day for them embracing our model or something close to it and working with our companies and our governments. With regard to the place like Korea, I think Korea is on the fence there.

Robert: They’re really in a hard place. But I don’t think Japan is there yet. Japan still understands that it’s in their interest to push back. They’re not going to be the tip of the sphere. The US has to be the tip of the sphere. And unfortunately, under president Trump, who I give credit for raising the issue of China more assertively than past administrations tend to go. He tends to go at it alone and alien in our allies. And I think that’s just not a winning strategy. You have to be an allied strategy. And I think if we do that, I think we can keep the coalition together if we do it right.

Steve: I agree with your characterization that Trump should get credit for pointing out the problem, but that he’s tried to go it alone. And that may not be the way that we can win. In fact, if you look at direct US, China trade competition, I think we’re exports to the US are only something like eight percent of their GDP now. So it’s somewhat limited the degree to which we can hurt them through just-

Corey: Unless there’s as a coalition.

Steve: Without a coalition. Yeah.

Robert: Yeah, absolutely. As we wrote about, I guess it was 2011 when we wrote our first report on China, it’s called, Enough is Enough Confronting Chinese Innovation Mercantilism. What we said in that report is there’s a window of opportunity here that diminishes every year and at some point they won’t care. There will be so little we can do to them and they’re close to that. Now there’s interesting, one of the last weapons we have is export controls technology and we’ve seen the administration use that. Now, the problem with that is the Chinese are pretty advanced. They can get a lot of that technology from the Koreans or the Taiwanese if they’re not good at it. But that really has provided them with a Sputnik moment. They really have doubled down on that to become even more independent. We had an opportunity, I’m not sure how much we’re able to make of that in the future, which is why I think the most important pivot we have to make is towards, not that we shouldn’t continue to push China which we advocate for, but we need a domestic industrial or innovation strategy that’s robust to out compete them, to out race, win the race with them. And we don’t have that right now.

Corey: So if you had a very large check presented to you, maybe a trillion dollars in R&D spending and you can allocate it to sectors or however you want, you must have a few thoughts of where you put the money.

Robert: Sure. I was pleased to hear recently that Senator Schumer, who’s the Democratic leader in the Senate gave us talk or remarks, whatever we was talking about, potential yet a 100 billion dollar a year initiative for R&D and core technologies that are critical to both our defense needs and our commercial needs. So things like AI, autonomous systems, and the like. So I think one of the things we could start with is to identify these technology areas. Then have some competition where we would say to our leading research universities around the country, you can compete for these to be like Michigan, I’m making this up. Okay. So Michigan might say we’re going to really focus on autonomous systems because we’ve got a great department there, we’ve got real capabilities. We’re going to reach out to industry and the federal government could make a 10 year commitment to say we’re going to give you 50, 75 million a year to beef up that efforts.

Robert: And also to make sure that it’s not just academic papers published over in some foreign journal, but that you’re going to work with spinoffs or existing companies and try to help companies in the US. So we can do that. You know, as I mentioned before, we have these manufacturing USA centers. We’ve created 15 of them. They’re very good, but they’re not well funded. The Chinese have created 15. The same 15 we created. The first six were exactly the same as our first six, but they’ve created about 50. Now they’re planning to create about 45, each one of their centers that already exists as an order of magnitude higher funding than ours do. So I would do things like that. I would expand the programs we have to help our small and midsize manufacturers automate, modernized, train their workforce. I would expand the R&D tax credit. I would think about, do we need analogs to SEMATECH, which we had in the 1980s and 90s around the semiconductor industry.

Corey: Sorry. Analogs to SEMATECH?

Steve: SEMATECH was a private public partnership, which was very controversial in the 80s to help US companies compete against the Japanese.

Robert: In the semiconductor?

Corey: Yeah, in the semiconductor industry.

Robert: There’s a general view. You talked to people in the semiconductor industry that was led by Robert Noyce who was one of the founders of Intel and not led by but spurred by him. But in general view that it was a successful program and we have a similar program now, well I shouldn’t say similar, a much smaller program now that’s run out of DARPA, the defense advanced research project called, I believe it’s called star net now and it’s a public private partnership where I think there are six universities around the country that are very good at advanced semiconductor research. So doing research where the benefit’s not going to be here for 10 years or longer. And what Star Net does is it gives these university centers money that it has to be mashed by semiconductor firms and they have a semiconductor technology roadmap where they say, “Okay, this is the areas that we think are really important.” And it’s all together. The government, the university researchers and the industry. And one of the benefits of that is it also produces very good graduate students and really understand this and gets more graduate students. Why not do that in 20 industries, 10 industries? I think there’s some real opportunities for something like that.

Steve: I think one of the big differences, and this is something Corey and I have discussed on other podcasts, is that the Chinese are behaving as if they believe that this societal level ROI on R&D investment is high and the United States is behaving as if we don’t have faith that it’s going to turn out to be high. So when Corey made you give your confidence intervals for where the reality could turn out, that Chinese leadership are anchored at the high end and the US leadership is anchored more toward the bottom end and we’re just behaving as if that’s our belief, what we believe. So it’s unfortunate.

Corey: Well, it’s interesting because it’s not clear to me what our leadership believes, but I think our leadership parrots, but it believes its constituents believe and they may be right, but there’s a certain set of constituents out there who are very skeptical of universities and how they conduct themselves and our politicians have to pay attention that the Chinese don’t have to, they just simply can ignore people like that.

Robert: Well, I think it’s a combination. I agree with that some extent, but I think most Americans, if you look at some of the polling and they, you ask them, should we invest more in science and research in the country? Most Americans, when they get that poll question, they say yes. Even if it’s at universities. I think it’s probably more of the English literature departments that they have a problem with and not the electrical engineering department. I think the problem is a little more insidious than that. It’s that if you’re a member of Congress and you want to get out and give a speech about why we need a national industrial strategy, you’re going to run the risk of having some Newsweek columnist or pundit or some think tank over here in Washington or some economists write an op ed that says that not only you don’t know what you’re talking about, but you’re going to hurt the country.

Robert: You’re clueless. So a lot of our elected officials are just, they don’t feel like anybody has their back. Elected officials are like anybody else. They don’t want to go too far out in front of the popular received wisdom. And the popular receive wisdom from the punditry is still, I mean, you look at what Larry Summers recently wrote a former head of the National Economic Council in Obama and at the treasury. Larry Summers says, we don’t need a national industrial strategy. It’s terrible. Who do you… You’re a member of Congress. You think you know more than Larry Summers. Who are you? So that’s a big problem. If our elite expert class was a 100 percent or 90% behind doing this, we’d make a big, big difference, but they’re actually just the opposite for many of them now. I have to say that one of the good things that I’ve seen in the last two years, you have seen a number of academic economists, David Otter for example, and many others who began to say, “Wait a minute, that consensus was wrong. We got it wrong. We do need a more active role for governments.” I don’t want to sound overly negative, but I do think things are moving more in the direction we’re talking about, but it’s still difficult.

Corey: One challenge I think that I’d like to official might face if they propose this type of program is they’ll be asked, how are you to pay for it? At one point in time, Republicans cared a lot about the deficit, so that was a stop on that edge. They seem not to care when it comes to tax cuts. But the thing is we’re running large deficits. And my sense, I’d like to hear your action, is that although the military spending has led to a lot of good technological spinoffs, it’s still a massive inefficient way to spend that much money. And so, it seems that we should look at China which spends, I don’t know exactly the fraction of our military, a third of what we spend on military. They spend quite a lot less and that leaves more money to spend on industrial policy and Japan, spends almost nothing on the military, which allows them to spend-

Steve: One percent, they’re constitutionally constrained I think.

Corey: Yeah. So they could be court costs constrained, they decide we push them toward this, but it’s been a massive distortion where we basically wasted lots of money protecting Japan and not investing all these highly productive industry. So I guess I want to get reaction to my critique would just cut the hell of the defense budget and put it in R&D and you’d get really significant returns.

Robert: Well, a couple of… One is, and this is where I think president Trump has had real appeal politically. First of all, I’m not a military person. I’ll say that as a caveat.

Robert: First of all, I’m not a military person. I’ll say that as a caveat, but what did we get for all that time in Afghanistan? I don’t know. It appears now we’re walking to walk away and … We have been the world’s policemen and that is a huge sacrifice. So we spent a lot of money on that. The NATO allies don’t contribute their fair share, the South Koreans don’t contribute their fair share, so we decided we’re going to do that. If you look at other countries, they don’t spend anywhere near as much on defense R&D, where they put all their money is in commercial R&D. Not just the Chinese, the Koreans, the Japanese, the Germans.

Robert: So, I think there are certain things in the defense budget that really are very important, like DARPAs big push into autonomous systems and in the AI and all that. So if we’re going to cut defense, I’d be kind of more inclined to not cut the what’s called the 6162 budget, which is the early stage R&D. And more, here’s a good place you could cut defense spending and that’s base closures. We have a lot of bases that the DOD wants to close and we don’t close them because everybody in their congressional district and the members want to keep them, but I’m not actually as concerned about the money issue, the budget issue for two reasons.

Robert: Number one, if we don’t do this, we’re going to be like Great Britain in 15 or 20 years, very hollowed out economy, very, very serious problems. So we have no choice. Secondly, if we wanted to do this for a pay for … I’ll give you an example, we wrote a recent op-ed in the congressional newspaper where we argued we could double the research and development tax credit and still have lots of money, lots of money left over by making one small change to the tax code, and that’s to tax dividends as normal income.

Robert: So right now if you’re a stockholder, you get dividend income, it’s taxed at a much lower rate than normal income, assuming you’re a high earner, which most dividend recipients are high earners. What are we doing? This is just a giveaway to wealthy people. In fact, it’s even worse than that. There was a good study by an NYU finance professor who found that the lower you tax dividends, the more companies give dividends, rather than retain earnings to then reinvest in equipment or workforce training or R&D.

Robert: So I don’t think the money thing is all that. You fix the dividend thing, you can fix what’s called carried interest for a venture investment, you could raise the top rate on rich people a little bit. There’s lots of things you could do and so I think to me in some ways, it’s just an excuse for not doing anything.

Steve: As a budget item, R&D is really quite small, so if you just have faith in it, it isn’t that hard. I agree with Robert to actually find the money to fund R&D.

Corey: I mean, look, theoretically, you can identify these things but to hold another political motion to get these things through, almost everyone’s talked … Not everyone but a lot of people have talked about raising the tax on dividends, changing the carried interest deduction, and it just hasn’t happened because wealthy people … I mean I’m hypothesizing but wealthy people are just too influential in the political system, or at least politicians feel too beholden to them to do it. And cutting the military is a problem because as you pointed out, their bases associate with every congressional district, and so I agree.

Corey: At a theoretical level, you can easily identify line items you could change that would give you that money, but it seems that we have not increased R&D substantially and I don’t see it happening in the near term.

Steve: But if you were an R&D optimist, and so you put the ROI from R&D near the higher end of that realistic range, you’d be willing to do deficit spending to do it, right? Because it’s still going to pay for itself. You can borrow the money to do this.

Corey: Yeah I would, but I kind of see how it’s going to operate in the political calculus in DC. That’s a lens of which it’s going to be argued, right? People who are against it are going to say, “How are you going to pay for it?” So I’m kind of looking at this through a political lens.

Steve: I think Robert’s in the trenches on that.

Corey: So I’m curious. Yeah. So when you make this argument to people, what do they say back to you and why do you think it hasn’t happened yet?

Robert: I made this argument at a congressional hearing and the member of Congress said, “No, it doesn’t.” And that was the end of the discussion. So look, for-

Corey: But that’s not the consensus, I don’t think. I assume that people in that hearing who agreed with you probably.

Robert: There were some, but they were more frankly on the other side. It’s interesting. That’s one of those things from both sides of the aisle on that one. So the Republicans oftentimes … By the way, just to be super clear, there is a growing consensus now. Particularly in the Senate, we have very strong Republicans and Democrats who both want to do something that we’re all talking about now.

Robert: People like Senator Marco Rubio, Todd Young from Indiana, both Republicans, Cory Gardner of Colorado, Chris Coons, Mark Warner, Chuck Schumer. But sort of on the extreme side of both parties, you have some Republicans who say, “I just don’t believe that. The smaller the government, the faster the economic growth. Given whatever data you want, it’s not going to make a difference.” And on the left side you’ll have things like, “That sounds like it’s just going to help companies. Companies already have too much money. We need to spend the money on healthcare, universal coverage” or whatever that might be.

Robert: So I agree with you that this is going to be a hard sell and I think there’s really only two ways this hat resolves. One is just the frog and the boiling water. We don’t wake up and we wake up eventually one day like great Britain did and saying “Oh man, we’re just a second rate country now and then we’re just going to have to slog it through and we can’t get it back cause we’ve lost so much.” It’s very hard to get back at telecom equipment industry now. Very hard to do cause we lost it. Imagine if we were to lose our chip industry, our biotechnology industry, our machine industry, and our aerospace division. You don’t get those back.

Robert: The second possibility though is some kind of more of a wake up call from something China does. Do we have some kind of spat in the South China sea? Do they try to take over Taiwan or something like where we say, “Okay, this is an existential challenge. We’ve got to really double down.” I think it could go either way, but you’re right. American politics have really become much more partisan and hard to get things done. So it’s not like it was in the 60s, 70s. Even in the 80s, we had a bipartisan consensus with Reagan and the presidency and the Democrats in the house and the Senate to confront Japan and we did.

Robert: I mean, people forget that there was a slew of legislation passed in the 80s. The R&D tax credit, the SBI, our small business innovation research program, changing the prudent man rule to allow venture capital funding, the omnibus trading competitiveness act. I mean you just name it, I can go on and on and on. Creating the National Institute of Standards and Technology. An incredible flurry of really important legislation that made an important difference in us to be able to compete but now we don’t seem to be able to do that anymore. Or it’s a lot harder.

Steve: It’s very strange because that was in response to an economic competitor that had half our population and essentially no natural resources. Whereas now we’re facing four times our population, much bigger country, and we can’t seem to get activated.

Robert: Yeah. And Japan was an ally.

Steve: Right. And we still are militarily occupying the country. Right? So-

Corey: Occupying, i.e. Paying for their military protection.

Steve: Yeah. But also we can exert a lot of pressure on them through that so.

Corey: It’s true.

Robert: Yeah, yeah. No, you’re absolutely right. It’s, it’s crazy. I mean, if we responded to Japan, a half the size and there were no military threat, why are we asleep at the switch now with China, which is much, much bigger and clearly vying for military influence at minimum?

Steve: But I have heard … I’m not in Washington that much, but I have heard that the one bipartisan thing that everybody can agree on is that the U.S has to be concerned about China and has to take some strong actions.

Robert: I agree with that. That’s why I’m cautiously optimistic, more optimistic than I’ve been in my 30 years in Washington really. I mean, I was optimistic at the beginning. When I was here first, we were doing things and then we went into this dip and now we’re beginning to understand that we have to do things. So I’m cautiously optimistic without being partisan because we’re not a partisan thing.

Robert: I do think one of the challenges is the Trump administration, Mulvaney whose head of the OMB ops management whose ideal budget as far as I can tell is zero. I’m exaggerating obviously, but you know he’s … They proposed cutting almost all of these programs. Now, their budgets are essentially dead on arrival when it comes to the Senate and the House, but still, that makes it harder. If you had a presidency that was saying, “This is important. We want to do this.,” it does make that easier for Congress to then follow.

Corey: Robert, are there other countries who you think are getting technology policy right or maybe industrial policy writ large, right? Setting China’s side, is there other countries for whom we could learn really important lessons where we’d open our eyes and really pay attention?

Robert: Yeah, I mean one of the problems with that, which makes it hard to argue by the way for good industrial policy is there are several components of doing this effectively. And one of them are the kind of more active kinds of measures that we are talking about, but clearly another one is having the right regulatory system and not overly regulating your companies and having these onerous rules and then sort of embracing what the Europeans call the precautionary principle. So I can look at some European countries and say, “Wow, they’re really doing some good things.”

Robert: Countries like Germany now, who by the way, spends more on R&D than we do, which 15 years ago they didn’t. The Netherlands, Finland, Sweden. I can look at all those countries. They’re doing pretty well. Even frankly the UK, I think they’re doing a really, really good job from a policy side, but then I look at Europe and I go, “You’re regulating privacy so strictly that you’ve gotten the balance all out of whack. You can’t really do innovation with data there. You have the precautionary principle when it comes to things like GMOs and new technology.”

Robert: So they’ve got some things right. They’ve got other things. But I think they’re really hurting themselves. I look at a place like Israel. Israel to me … And again, the challenge there is it’s a much smaller country, but they are doing great. A book called Startup Nation talks about how … To your point about the military, they’ve been able to fund lots of really interesting things in their military that they spin out into world leading companies. I think Taiwan is an interesting case. They’ve done a good job. Singapore, but there’s no really perfect country.

Robert: Under the Trudeau administration in Canada. I have to give them a lot of credit. They’ve put in place some really interesting national technology programs, including the SuperCluster program for things like AI. What I think the overall message is, is virtually every country, every major country in the world now has woken up to this and they’ve woken up to the reality that they have to have a proactive/industrial/technology strategy. We’re one of the few countries that hasn’t woken up yet. We’re still … Part of it’s like that old commercial. What is it? We’re Hertz or Avis? We try harder?

Steve: Yeah. We’re Hertz so we don’t have to try harder.

Robert: We’re Hertz. We don’t have to try. We’re number one. We’ll always be number one. But we’re not anymore. That’s the thing.

Corey: So another theme of our podcast is human capital and talent. And so a lot of the war for technology is just the war over tech workers and talent. And so I’m curious to hear if you have any really specific views about how we should change our immigration policy, if at all, to address the challenge from China. People joked during the financial crisis that we should simply make Detroit a free immigration zone and hand out visas to hide people with blink start businesses. And it was an idea that … I don’t know if it went much further than this building, but it struck me that immigrants are often people who create businesses and well-educated immigrants often start companies. There was a thought for a while you should staple a green card to every PhD issued in a tech field.

Robert: Yeah. So there was actually a … I forget the name of the program, but it was if you came to the U S and you invested a certain amount of money, you can get as-

Corey: Yeah, $5 million I think.

Robert: Yeah. And so DHS, was Department of Homeland Services was doing a review of that and it ended up Trump, I believe ended up killing it or reducing it. We had an interesting, I thought a reform of that, which was you would get that, but only if you invested in a business that was a traded sector business. So a lot of those companies, if people come in there, they invest in a bagel shop or a hotel, not knocking them. They’re hardworking people in all this, but we don’t need any more bagel shops. Those are going to happen. But if an entrepreneur comes in here and says, “I got a great idea for a machine tool company, I want to sell it around the world.” Like yeah, that’s the kind of person that we need.

Robert: I think one of the challenges with immigration now is that a lot of our high skill immigrants from a STEM perspective are from China. And there are certainly cases, and I think it’s really important to get this right. Most of these Chinese immigrants or students are … They bought them and want to be here and they’re not spies, no question about that. But some of them are. That’s been documented. They’ve come over here almost with task orders. And so I think it’s … Whatever you believe about that and whatever you want to do about that, I think that it suggests that we’re not going to be able to rely as much in the past as we have in the future is what we have in the past on really high skilled Chinese immigrants.

Robert: So are we going to get it from India? Well that’s the other main place we’ve been getting them and maybe. But so I agree with you that we should do a better job. I’m of the view that it should be easier to get a green card, particularly if you have a graduate STEM degree from a U.S university. The other thing I will say is I think we’ve long given up or not done enough to get more Americans into this space. We’re doing an event in about a month on how do we reform computer science education, really at universities where many universities in the country cannot expand their CS enrollment because of state budget limitations.

Robert: They just don’t have the money from the legislature for nearly hiring CS professors or engineering professors. You got to pay more because they’re in such demand. So I think we could actually do a better job of getting more kids in U.S universities and colleges to graduate if we could expand the programs we have. But again our point earlier, that requires money. That requires federal and state money to say that’s an investment we want to make in the future.

Steve: Well, we’re almost out of time. I wanted to finish by asking you for a non-obvious prediction over the next few years or maybe five years that you think will transpire in, for example, in US-China to competition. Is there something that we’re all overlooking that you think is going to happen?

Robert: Well, maybe it’s obvious, maybe it’s non-obvious. I think Chinese economic growth rates are going to slow down no matter what we do. Obviously we’re playing a role in that. The unfortunate Coronavirus is playing a role in that. So I think Chinese economic growth rates are going to slow down partly just as you get to that middle income. I don’t call it a trap, but it’s harder to grow when you get to that point and that that will be interesting to see how the Chinese political economy and the political system deals with that.

Robert: Secondly, my other prediction would be I have a bet with a colleague on a thing called the Long Now foundation. This is Stuart Brand’s pretty cool foundation thinking about what’s going to happen in a thousand years and you can make these prediction bets and the money, the winner, it’s donated to a charity of your choice. And so I bet with a colleague that I think I said by 2024, U.S labor productivity growth rates will be above 2.5% or something like that. Right now it’s about 1.3%.

Robert: So I’m optimistic that this next technology wave is going to kick in even if we don’t do what we should be doing. It’s just a lot of great technology out there and companies are going to be making more investments because the benefits of it are more real. And so in that sense, I’m a little optimistic that we can wait through four or five years, we’re going to see maybe growth rates like we saw in the 90s productivity growth rates.

Steve: That would be fantastic.

Robert: And that would help [inaudible 01:20:36] obviously.

Steve: That would be great. Our guest today has been Robert Atkinson. Robert, thank you very much for your time.

Corey: Thanks a lot, Robert.

Robert: Hey, my pleasure. Thank you.

Creators and Guests

Stephen Hsu
Stephen Hsu
Steve Hsu is Professor of Theoretical Physics and of Computational Mathematics, Science, and Engineering at Michigan State University.
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