Is Congress Ready to Invest in Regional Economies?
Some parts of the country have fought like bandits in recent years. In the decade between the Great Recession and the onset of the pandemic, 90 percent of technology and innovation employment growth was in just five major metropolitan areas. Each year, around 80 percent of the country’s venture capital funding flows into just three states: California, Massachusetts, and New York. The pandemic hasn’t changed that.
The United States is less of a land of opportunity than a nation of opportunity, suggest MIT economists Jonathan Gruber and Simon Johnson in their book Jump-Starting America. “We are increasingly relying on a small number of coastal superstar cities to drive our innovation economy,” they write. “Much of the rest of the country has now failed.”
There is now a serious interest in Washington in promoting the spread of the wealth. A bipartisan proposal called the Endless Frontier Act would provide $ 100 billion in research and development funding over 10 years, including $ 10 billion to build new tech hubs across the country.
“We have so much untapped potential across the country,” said Indiana Republican Senator Todd Young. “We have a number of people who are not fully involved, people whose talents are not being used, people who don’t live on the coast, who don’t live in big cities like New York or Silicon Valley or Austin or the research triangle in North Carolina. “
Young is the leading co-sponsor of the Endless Frontier Act, along with Chuck Schumer, majority leader of the New York Democratic Senate. There are more ambitious plans than hers. President Biden has proposed spending $ 20 billion on empowering new technology centers, while a competing Senate bill has proposed $ 80 billion.
“If done well,” Young said, “generations of talent will be able to pedal through these tech hub locations to make sure we as a country shoot at all cylinders.”
The Endless Frontier Act faces its first scrutiny Wednesday when it is scrutinized by the Senate Commerce Committee. An earlier markup on the bill had to be postponed when it included 200 amendments, many of which addressed exactly where the money should go.
Of course, given the potential for billions in federal investment in certain metropolitan areas, Senators have a keen interest in seeing the funds flow into their own states. There is also resistance from rural senators who do not see much positive for their constituents.
“If you’re in Alabama, you can win this lottery,” said Robert Atkinson, president of the Information Technology and Innovation Foundation, which promotes the expanded tech hub concept. “But there are places where that isn’t really possible. Wyoming is not going to win. “
Young and the other sponsors of the bill are trying to address these concerns. The whole thing could be rewritten on Wednesday to ensure tech hubs are spread across every region monitored by the U.S. Economic Development Agency, while allowing more money to flow into smaller markets.
This is the Washington approach – making sure the legislation produces enough winners to keep everyone happy. It is sometimes ridiculed as the “peanut butter problem” – money is evenly distributed, but it can be too thinly distributed to do much good.
That approach won’t work when it comes to building new centers that can compete in the knowledge economy, says Atkinson. It needs concentrated federal investment in a limited number of places where good bones are already in place – research universities and existing business clusters – to have realistic hopes of creating hubs that will attract later private investment.
“We need a few places that are so successful that companies all over the world want to be there,” he says.
There is a persistent argument that the government has no winners for company selection. The government has certainly poured money into companies and industries that haven’t paid off. The most famous recent example is Solyndra, a failed solar panel company that made federal loans worth $ 535 million under the Obama administration before it collapsed.
Industrial policy – the whole idea that the federal government can direct growth – has many doubts. “It really has to be managed locally,” says Joel Kotkin, an urban researcher at Chapman University. “They have teamed up internally, be it Fargo, Fayetteville or Des Moines. I can’t understand why the federal government should choose one place over another. “
Atkinson counters that there is ample evidence that subway areas made their fortunes through federal investments, such as government contracts for semiconductors in Silicon Valley. From military bases to land grants colleges to the Tennessee Valley Authority, the federal government has a long history of placing bets that paid off on specific locations.
“Boston would have been a shoe maker without MITER” – a cyber-tech company – “that was really boosted by the Kennedy administration,” says Atkinson.
Now that billions are on the table, Congress is not so much about whether the government can choose winners, but more about which winners could be chosen. Mississippi Senator Roger Wicker, the top Republican on the trade committee, has objected to the notion that a lot of money will flow out of Washington but not reach any smaller states or rural areas.
Gruber, the MIT economist, notes that much of the country’s rural population actually lives in designated metropolitan areas. You should see spillover effects if the dominant city in their region is selected for federal funding. Even if they’re not directly adjacent to a new hub, people in the Midwest can benefit from looking for work in a supercharged St. Louis or Cincinnati, for example, without packing and driving to Austin or Seattle.
“The idea that this is not useful for rural America is just wrong,” says Gruber.
There is considerable irony in the fact that senators argue about what types of places could get federal designation as New Technology Centers. Most federal research and development spending – and indeed the lion’s share of the money in the Endless Frontier Act itself – is spent on peer-reviewed funding programs from the National Science Foundation, dominated by MIT, Berkeley, and a few others.
The Mississippis and Wyomings of the world stand no chance under these common funding methods. The federal government would still pick winners, only it would be the usual, well-established suspects who would continue to come out on top.
“If you just run the same R&D system, it goes to certain universities that dominate it,” says Mark Muro, policy director of the Brookings Institution’s Metropolitan Policy Program. “You have to steer actively if you want to achieve different results from more R&D investments.”
When Amazon looked for a second headquarters, it seemed like every city in the country had a suggestion. In the end, the company picked the most predictable locations – Washington, DC, the surrounding area, and New York City. (The New York deal failed, but Amazon is still creating thousands of additional jobs there.)
Not every place can become Silicon Valley, but more places can be home to HQ2s, Atkinson says, especially as more and more large corporations try to redistribute their workforce after the pandemic.
“Many places will have secondary offices, but they will be located in Shanghai or Tel Aviv,” he says. “You should think of Indianapolis or Birmingham.”
The importance of federal investment
The federal government has never gotten out of funding scientific research, but it has certainly had less of a priority in recent decades. In the 1960s, the government devoted 2 percent of the economy to research and development. Now it is 0.6 percent, which puts the US in 12th place in the world.
“The Endless Frontier Act is an initiative in response to China’s significant investments in research and development, cutting-edge technologies of the 21st century, artificial intelligence, quantum computing and genomics – the very platforms that economic sectors can build on in the future,” said Sen. Young The Washington Post, “If we are to outgrow the Chinese Communist Party, innovate and ultimately outperform the competition and make sure our values prevail and are defended, it is important that we invest in these areas.”
Corporations have filled some of the R&D dollar gap, but they’re not doing the kind of basic research that leads to breakthroughs or even entirely new technologies, like innovation centers like Bell Labs used to do. Most private research and development work is devoted to improving specific products, not opening up new areas.
“IBM stopped rewarding its scientists for publications and instead offered rewards for patents,” says Gruber. “Business scientist publications have dropped 60 percent over the past 50 years.”
Nobel laureate Walter Gilbert initially suggested setting up a private company to lead the human genome project. That idea failed, and most of the money was ultimately provided by the National Institutes of Health. Mapping DNA has paid off not only scientifically but also economically. 270,000 Americans are employed in the genomics sector. Not to mention its importance in coronavirus vaccine development.
When it comes to increasing federal investment, there is also an argument for moving some of the money to more places. The battle in Congress is just over as to who could get the pool of tech hub money that Young and Schumer are proposing. Ultimately, the whole idea of public investment in research and development would enjoy greater political support if the economic benefits were not all harnessed by San Francisco, Boston, and a few other locations.
“Basically,” says Gruber, “the whole country wins if we can relocate part of our tech economy to the center of the country.”