Off track: America's economy is losing its competitive edge, and Washington hasn't noticed

Washington Monthly, March, 2005 by Benjamin Wallace-Wells

The worry of economists and business leaders is not simply that Japan, Israel, or South Korea will beat us, like one football team does to another. It is, more precisely, that we'll only be able to take advantage of rising wages in those countries (and afford our own here) if we continue to create new, cutting-edge products and services to sell to those countries--and right now America does not seem to be doing as much of that as we were just a few years ago.

This new competition from other developed countries, and the failure of America to fully keep pace, is one cause of our anemic job creation, three years after what was, by historical standards, a brief and fairly light recession. Another mason, of course, is the rise of China and India, where U.S. firms have not only moved manufacturing plants but also "outsourced" service sector jobs. America's employment base is being squeezed by these two pincers--China and India from below, and the developed world innovating from above. Over time, those pincers may come together, as China and India also become proficient in high-end innovation. China is already opening universities at a breathtaking clip, while Intel, Hewlett-Packard, Microsoft, and Verizon have all opened research labs there--the kind that anchored the development of Silicon Valley. "It's become inevitable," says Ross Armbrecht, president of the Industrial Research Institute, which is the think tank for the research arms of America's corporations, "that more and more of the most far-reaching innovations will be going overseas, to India and China, in the near future."

Economics is a negotiation in uncertainties, and so nobody's really sure what all of these changes will mean for the well-being of the American middle class. But when you survey economists, policymakers, and business leaders about America's long-term future, it's hard to find many rank optimists; there are the Panicked, and then there are the Merely Tense. Richard Lester, the head of MIT'S Center for Innovation, told me he belongs in the latter camp: "Things look somewhat bleak in the long-term, but if you look around Boston, at the incredible concentration of talent and opportunity here, we've still got a head start, and if we're smart we can probably build on it." Among the Panicked are economists such as MIT Nobelist Paul Samuelson, who has recently argued that the rapid spread of innovative capacity to other countries with lower labor costs makes him doubt the whole doctrine of "comparative advantage," on which much of modern economics rests.

If there's a way to escape this grim future, economists agree, it is for America to reverse its slowly slumping innovation machine. Perhaps the hottest area of economic research right now centers around technology, trying to figure out what exactly the United States did in the '90s and how we can do it again. In university economics departments and corporate executive suites across the country, the sense that we're in a pivotal fight for continued economic preeminence is already common knowledge.