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Innovation Blog

Innovation That Shoots Blanks

By   Shlomo Maital


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Despite America’s ongoing economic crisis, weak currency and massive debt, the U.S. comforts itself that it is still the world’s most innovative, entrepreneurial nation.  Most of its hopes for emerging from the crisis are pinned on its innovation.

  There is new evidence this hope is misguided. America’s innovation cannon is firing blanks.  This is the view of 2001 Nobel Laureate Michael Spence, from Columbia U., who in a new study with a colleague has explained why American innovation creates no gains for American working people.*  The syndrome he describes afflicts Israel as well.  The gains from Israel’s innovative high-tech sector accrue to a very small fraction of the work force. 

   It is not true that the U.S. economy fails to create jobs.  Some 27 million jobs were created between 1990 and 2008 (the year the global crisis began).  The problem is, all but two per cent of those jobs were in services.  And most of service jobs were low-paying ones, such as Wal-Mart clerks, hotel maids or low-paid government jobs.  

   Almost no job growth at all occurred, according to Spence, in manufacturing, where high-paying jobs for workers once existed.  The reason: outsourcing.  And the few remaining American manufacturing jobs are threatened, because emerging markets are moving up the value chain.   Moreover, though America has cut its trade deficit by half between 2007 and 2009, all of that gain came from import reduction, not from a rise in exports. The weaker dollar makes U.S. exports cheaper and more attractive – the problem is, America makes very few goods for export, at any price.

   In 1979 manufacturing made up more than one out of every five U.S. GDP dollars.  Today, it is about one in every ten GDP dollars, or proportionately half.  The result has been disastrous for the average American worker, whose weekly pay peaked in 1974 at $709 (in 2010 dollars) and fell to only  $649, a drop of 8.5 per cent,  by the end of 2010.  This means that an American, working at exactly the same job as his or her father, earned less, even though in the same 37-year period U.S. GDP per capita almost doubled. The cause is mainly America’s myopic transfer of its manufacturing jobs to China and South Asia. 

   Let us all learn America’s bitter lesson – innovation is fruitless if you only create ideas and let other countries make the products.  You create a handful of billionaires, through massive exits, but no well-paying jobs.  Moreover, innovation joined with on-site manufacturing is far more powerful than R&D isolated from production.

* Michael Spence, Sandile Hlatshwayo, “The Evolving Structure of the American Economy and the Employment Challenge”, Council on Foreign Relations, March 2011.



Blog entries written by Prof. Shlomo Maital

Shlomo Maital
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