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Measuring Future U.S. Competitiveness

Measuring Future U.S. Competitiveness

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Adam S. Hersh and Christian E. Weller show that policymakers must give more attention to strengthening factors that could lead to future productivity growth and rising living standards.
Adam S. Hersh and Christian E. Weller show that policymakers must give more attention to strengthening factors that could lead to future productivity growth and rising living standards.

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Published by: Center for American Progress on Feb 09, 2011
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1Center or American Progress | Measuring Future U.S. Competitiveness
Measuring Future U.S. Competitiveness
U.S. Productivity and Innovation Snapshot
Adam S. Hersh and Christian E. Weller February 9, 2011
Produciviy growh—he rae a which we increase producion wih a given amoun o  work and resources—is criical o our naional economic prosperiy and compeiive-ness, and a acor ied closely o he pace o real invesmen. Invesmens in equipmenand innovaion lead o produciviy growh, and produciviy growh leads o long-runincreases in our sandard o living. As he U.S. economy coninues o pull ou o he Grea Recession, a number o rendspoin o clear signs o rouble or presen and uure U.S. compeiiveness. Firs, invesmenconinues a a slow pace, barely keeping up wih capial depreciaion. Second, he eecso slow invesmen can be seen in lagging produciviy growh, which is below average orhis poin in a business cycle. Tird, he U.S. high-ech rade deci is widening once again. Ye a number o ingrediens or aser produciviy growh in he uure do show prom-ise. Tis is rue or privae secor-led research-and-developmen spending, he numbero newly rained Ph.Ds now being mined a our universiies, and signs o recovery inhe venure capial secor providing criical invesmen o early-sage innovaion, espe-cially or clean energy echnologies.Te daa presened here poin o subsanial challenges ahead o U.S. economic prosper-iy. Te snapsho o U.S. produciviy and compeiiveness presened here shows hapolicymakers mus give more atenion o srenghening he acors ha could lead ouure produciviy growh and rising living sandards.
 The numbers tell the tale
Investment drives productivity growth
Figure 1 depics he long-run relaionship beween invesmen and produciviy growhin he U.S. economy. Te red line plos he ve-year rolling average produciviy growhrae. Te blue line shows a ve-year rolling average invesmen rae as a share o gross
2Center or American Progress | Measuring Future U.S. Competitiveness
U.S. productivity snapshot
Past investment (17-year lag) and current productivity growth
Source: Author’s calculations of BEA and BLS data.
       D     e     c   -      7       0       D     e     c   -      7       2       D     e     c   -      7      4       D     e     c   -      7       6       D     e     c   -      7       8       D     e     c   -       8       0       D     e     c   -       8       2       D     e     c   -       8      4       D     e     c   -       8       6       D     e     c   -       8       8       D     e     c   -       9       0       D     e     c   -       9       2       D     e     c   -       9      4       D     e     c   -       9       6       D     e     c   -       9       8       D     e     c   -       0       0       D     e     c   -       0       2       D     e     c   -       0      4       D     e     c   -       0       6       D     e     c   -       0       8       D     e     c   -      1       0
Labor productivity growth rate
Investment rate(five-year average, share of GDP)
Investment (17-year lag)Output per hour (five-year average)
domesic produc, lagged 17 years. Ta is, any poin on he horizonal axis shows he conempo-rary produciviy growh and he invesmen raerom 17 years beore. Lagging invesmen indicaesa clear causal relaionship: Invesmen leads ohigher produciviy growh in he long run.
Investment is at the lowest level in four decades
Business invesmen has averaged 10.3 perceno gross domesic produc in his business cycle,rom December 2007 o December 2010. Tis ishe lowes average or any business cycle since he1970s. Low invesmen is no due o he cos oravailabiliy o capial. Ineres raes on corporae AAA bonds sand a jus more han 5 percen, helowes persisen ineres raes since 1966.
Andhe nonnancial business secor is holding more han $1.9 rillion in cash, oaling7.4 percen o oal corporae asses in he hird quarer o 2010—he highes levelsince he ourh quarer o 1959.
Investment is barely keeping pace with capital depreciation
Ne invesmen (invesmen minus depreciaion) has averaged 1.5 percen o GDP inhis business cycle, beween December 2007 and December 2010. Tis is he loweslevel since he 1940s and less han hal o he nex lowes average, 2.5 percen, ha wasrecorded rom March 2001 o December 2007.
Productivity growth lags behind previous business cycles
Produciviy growh ypically increases during a recession and early in a recovery.Produciviy growh or he rs 12 quarers o his business cycle, rom December 2007o December 2010, oaled 7.6 percen, below he average o 8.5 percen or he previ-ous eigh business cycles lasing a leas hree years.
Domestic innovation is down
Te number o uiliy paens (paens graned or he invenion o “new and useul” ormaerial improvemens o processes, machines, or maerials) graned by he U.S. Paenand rademark Oce in 2009 did rebound rom recession-year lows in 2008, jumping
3Center or American Progress | Measuring Future U.S. Competitiveness
6 percen o 167,349 paens graned in 2009. Bu even hough paens overall were up,he share o paens graned o Americans coninued a 15-year slide in 2009. In 1996,nearly 56 percen o paens graned were o U.S. origin. By 2008, his share dipped below 50 percen or he rs ime, and i sayed a 49 percen in 2009. Boh Americansand oreigners can apply or paen righs under U.S. law.
High-tech trade balance deteriorates sharply
Te U.S. rade deci in advanced echnology goods worsened sharply in 2010 despiea lower dollar and increased overseas economic growh. Expor growh o high-echgoods coninued o be srong, up 7.2 percen in infaion-adjused erms or he12 monhs ending in November 2010. U.S. high-ech impors—already larger—wereup 15.9 percen a he same ime. Te advanced echnology rade deci worsened onearly $80 billion, or 38 percen larger han a year earlier. Te high-ech rade deciamouned o 13 percen o he overall U.S. rade deci in he year hrough November2010, he larges deci since July 1998.Meanwhile, he U.S. services rade surplus in research and developmen reversed isdecline in 2009.
Te surplus in ne expors o research and developmen serviceseroded rom $5.1 billion in 2000 o jus $1 billion in 2008, bu in 2009 expanded onceagain o $2.6 billion. Service rade ypically consiss o ransacions beween a corpo-rae paren and is subsidiaries bu his surplus noneheless indicaes he srengh o criical R&D uncions in he U.S. economy.
U.S. government R&D spending lags far behind private R&D spending
oal infaion-adjused R&D spending by he ederal governmen increased rom$353 billion in 2003 o $423 billion in 2008, he mos recen year or which compleedaa are available. Privae-business R&D spending comprised wo-hirds o all R&Dspending during his ime and grew a an average annual rae o 4.5 percen hrough 2008.Federal governmen R&D spending grew a only 1.5 percen annually hrough 2008.
 The United States lags behind other countries in R&D spending
U.S. R&D spending amouned o 2.7 percen o GDP in 2007 (he mos recencomparable year), ranking eighh in he world. Israel, Sweden, Souh Korea, Finland, Japan, Swizerland, and Iceland all dedicaed a larger share o heir economies o R&Dinvesmen. China, in comparison, dedicaed 1.5 percen o is GDP o R&D andranked 24h among all counries.

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