The Next Economy

To create jobs at home, the United States must forgo protectionism and embrace innovation.

Over the last 15 years, about 3 billion people, or half the world's population, joined the global marketplace, from China and India to Russia and Eastern Europe. These consumers are ready, willing, and increasingly able to purchase high-tech products "made in the U.S.A." More than 70 percent of U.S. semiconductor sales come from outside the United States. The Asia-Pacific region alone accounted for 40 percent of Intel's revenue in 2003. These new players in the global marketplace may represent growth opportunities for U.S. companies, but they are also would-be entrepreneurs who pose a threat to the United States' economic and technological leadership. In addition, U.S. corporations must compete against overseas governments determined to make their countries the best place to do business. The economies of foreign competitors are growing fast. India's gross domestic product (GDP) is expanding at an annual rate of 8.1 percent, China's at 9.1 percent. These governments are developing infrastructures, offering tax and development incentives to attract investment, and, in many cases, deploying a more educated and motivated workforce than that of the United States. Just 1.6 percent of 24-year-olds in the United States have a bachelor's degree in engineering, compared to figures roughly two times higher in Russia and four times higher in South Korea and Japan. Chinese universities confer more than three times as many engineering degrees as U.S. universities.

The bottom line is that the United States no longer has a lock on the ideas and innovations of the future or the white-collar jobs that flow from them. Knee-jerk protectionism will not reverse this trend or keep jobs at home. Instead, the United States must rethink the government's role in research and development (R&D), establish a 21st-century communications infrastructure, and, last, pledge to "do no harm."

To make U.S. companies and the workers they employ more competitive, the federal government must prioritize investment in the industries of the future. The share of total U.S. R&D devoted to basic research (conducted without any specific application in mind) has fallen 37 percent as a percentage of GDP over the last 30 years. In 2000, the U.S. government sponsored 26 percent of all R&D, compared to 47 percent in 1981. This downward spiral is especially acute in the physical sciences, where funding has remained flat for several years.

Federal investment in basic R&D is critical because it benefits the entire scientific and engineering community. Some of the most significant innovations of the last 20 years, including the Internet and fiber optics, are products of basic R&D. Each year, the Massachusetts Institute of Technology (MIT) spawns around 150 spin-off companies. The more than 4,000 companies founded by MIT alumni and faculty today employ 1.1 million people, with annual sales totaling $232 billion. Without a significant federal commitment, the U.S. innovation pipeline will dry up. In order to remain competitive, the U.S. government should increase the budgets of public research agencies such as the National Science Foundation by 10 to 12 percent a year over the next five to seven years, make permanent the R&D tax credit, and fully fund additional initiatives like the Focus Center Research Program, a multi-university network designed to expand cooperative and long-range microelectronics research.

But investment is of little use without an infrastructure to support it. The U.S. government should also establish a national broadband-technology policy that enables deployment of a next-generation telecommunications network. An infrastructure that provides reasonably priced wired and wireless access to broadband will provide a backbone for future technological developments. Broadband is increasingly the medium through which the world conducts commerce and a crucial conduit for information and services, including education and healthcare.

In this area, the United States is already behind. According to the International Telecommunication Union, the United States ranks 11th out of 15 highly developed countries in wired broadband household penetration. The Federal Communications Commission is taking steps to free up parts of the currently underutilized radio spectrum for information-technology use. More ought to be done. The U.S. government should employ a minimalist approach to telecom-pricing regulation by doing away with the patchwork of local "rights-of-way" policies that inhibit the national expansion of broadband services and by creating targeted, supply-side incentives for investment.

Protectionist policies, such as legislation that penalizes U.S. companies for relocating jobs overseas, might postpone pain in the short term, but they will do irreparable harm to the U.S. economy in the years ahead. Another example of bad medicine is the U.S. Financial Accounting Standards Board's recent proposal to expense corporate stock options, which requires a charge to earnings when options are distributed. Stock options are an important employee recruitment and retention tool for many leading-edge companies in the U.S. technology industry. Regulating stock options will only discourage the use of a proven method of attracting talent and raising capital for eager, aggressive start-up companies. Other countries have already realized the benefits of such stock incentives. In 2002, China encouraged the use of such stock options in its 10th five-year plan for economic growth.

U.S. leaders need to look past the November election. Beyond the borders of their congressional districts and the "blue" and "red" states of the electoral map is a constantly changing world to which the nation must adapt. The government should help displaced workers, but it must also think years down the road and make some necessary -- albeit difficult -- decisions now. In the technology industry, we believe that you cannot save your way out of a recession; you can only invest your way to prosperity. The same holds true for the entire United States.


Rules with Teeth

The Iraq crisis reveals the need for a better approach than either militant unilateralism or feel-good multilateralism.

A moment of important choice is at hand. It is not a choice about ends, but about means: How best to defend and promote political and economic freedom in very dissimilar parts of the world? In both the United States and Europe, some have characterized this choice as one between traditional, feel-good multilateralism and militant unilateralism. The case of Iraq appeared to embody these two stark alternative strategies: The power of rules-based attraction versus the power of raw military compulsion. Although appealing in its simplicity, this binary choice is useful only to headline writers, not policymakers. Practical experience suggests that over-reliance on a single strategy leads only to different versions of utopia: the utopia of liberty spread from the barrel of a gun, or one of international rules and institutions based on goodwill alone. Both are equally illusory and equally dangerous.

The enduring lesson of the war in Iraq is the importance of linking force and legitimacy. Without the use of force, Saddam Hussein would still be in power in Iraq. No one in Europe wishes that. But force alone will not and cannot advance the cause of plural modernity. For that mission, legitimacy is required. And in the international sphere, legitimacy comes through multilateral action. The best way to advance the cause of political and economic freedom in the next century is multilateralism with muscle -- rules with teeth.

Today, the international community is confronted by two interwoven challenges. The first is addressing the "network threats" -- such as terrorism, the proliferation of weapons of mass destruction, and organized crime -- that are facilitated by a borderless, interdependent world. The second challenge is that of transition. How can free nations encourage political and economic freedom in very different parts of the world, with various traditions and starting points? Such change will require success on three related fronts: economic development, political democratization, and conflict prevention and management.

Failed transition will feed network threats, because criminal and terrorist networks take root in failed or failing states where poverty, repression, despair, and forced migration are endemic. If we fail to counter network threats, we will endanger transition. Economic integration has been a vital engine of global growth, allowing poor countries to catch up with the industrialized world. If security concerns trump our interest in human and commercial freedoms, then growth will slow and transition will falter. The starting point in confronting both challenges is to create stable frameworks of law and physical security. Strengthening the capacity to govern, effectively and legitimately, is vital to success in countries as diverse as Afghanistan, Iraq, and Haiti. The world may be business-driven, but it still relies on governments.

A "deregulation" in world affairs will not build the stable frameworks necessary to support wider political and economic liberty. The world needs more, not less, multilateralism. But this multilateralism must be action-oriented and capable of delivering results. No single country -- not even the United States -- has the wisdom, resources, or patience to tackle today's challenges alone. Because the most urgent contemporary challenges are transnational in character, they can only be tackled together.

Making the case for multilateralism might seem odd, given its many recent setbacks. The international community was deeply divided on Iraq. The validity of international verification mechanisms aimed at controlling the proliferation of weapons of mass destruction has been under stress -- not only in Iraq but also with regard to Iran and North Korea. We have seen blockage of the World Trade Organization's Doha round of negotiations, with no realistic chance of completion until after the U.S. elections in November. And the utter collapse of the 1993 Oslo accords was dramatized by the appearance of a new "wall." Yet, the pendulum is beginning to swing back. The international community is learning important lessons from these setbacks. We appreciate more clearly that the quality of international society depends on the quality of the governments that are its foundation. And we see that effective action to achieve this end relies on a mix of instruments that can best be assembled and deployed as part of a collaborative international venture.

Why, U.S. citizens might ask, should they play by rules when power will deliver what they want? The first answer is that bending or amending rules makes other nations more likely to do the same. We sign treaties on the rights of children, detained soldiers, and diplomats in part because sometimes it is our children, our soldiers, and our diplomats whose rights are in peril. The second and broader answer is that power alone will not deliver a safer and more prosperous world. Global trade, telecommunications, air travel, and the international financial system all require rules. So does the international political system.

International agreements and international organizations are a good start. But it is no use agreeing to treaties only to ignore them. It is no use setting up international organizations only to prevent them from functioning. If we want the world to work, we need multilateralism. But if we want multilateralism to work, then the powerful need to put their power behind it. A complex world needs multilateral bodies -- but it also needs leadership.

In most cases, only the United States can provide the necessary leadership. Precisely for this reason, the United States today has a chance to set a pattern of fair, universal, and enforceable rules that could last for years to come and make the entire world more secure and prosperous. Some economists predict that in fewer than 40 years China will surpass the United States as the world's largest economy and that, together, Brazil, Russia, India, and China will eclipse the economic might of the current Group of Seven industrialized nations. China, like the United States, is an exceptional country, and its progressive integration into the international system is a remarkable post-Cold War success story. If we prefer a future based upon mutually beneficial interdependence rather than strategic rivalry, then a stronger and more universal attachment to international rules is in all of our long-term interests.

Defending and promoting the liberties of modern life will require an unprecedented level of international cooperation. Success will require shared decision making and shared responsibility for making decisions stick. Multilateralism with muscle must be at the heart of this strategy. If the United States leads, others will follow. If the United States does not, they will go their own way, and the world will be the poorer for it.