The Pandemic Depression
The Global Economy Will Never Be the Same
China’s economic strategy is no secret. In the short term, Beijing will grow the country’s economy by manufacturing and exporting cheap, globally competitive goods. Over the longer term, it will build the capital, infrastructure, and expertise necessary to make the country an innovation powerhouse.
China is not the first to adopt this strategy. The same measures powered the rise of countries such as Germany, France, and Japan over the last 70 years. And even then they caused considerable trade friction with the United States. Washington accused all three of those countries of unfair trade and monetary policies—Germany and France in the 1970s and Japan in the 1980s. Recent U.S. administrations have accused China of the same. But this time around, the tension is more concerning. China is much more populous than Germany, France, or Japan, and its economy could easily become the world’s largest. Beijing also projects influence beyond its borders, sharing technology with smaller countries and endeavoring to create a set of close trade and investment relationships—ones that may one day be based on Chinese renminbi instead of the U.S. dollar.
In his second term, President Barack Obama tried to pressure China to change its behavior through alliances and international cooperation, most notably in the form of a trans-Pacific trading bloc. More recently, President Donald Trump has taken a confrontational approach and imposed tariffs on Chinese goods. Trump has labeled China a “currency manipulator” and seeks to end intellectual property theft and narrow the U.S.-Chinese trade deficit by waging a trade war.
But Trump’s sights are set on outdated threats. China’s economic strategy has already mostly succeeded. As a result, Beijing hasn’t artificially depressed the value of its currency in over a decade, and it has begun to improve intellectual property protection as a way to encourage local innovation. The bilateral trade deficit, while asymmetrical, is a bad reason to launch a trade war. There is no need to balance trade with any single trading partner, only to make sure the overall balance doesn’t become too lopsided.
The biggest threat from China is both much more serious and considerably easier to address than any the Trump administration has identified. Through government-led investment in research and development, China is poised to become the global leader in scientific and technological innovation in the near future, displacing the United States from a position it has held for 70 years. China’s rise in this area will not only threaten U.S. national security but deprive the U.S. economy of a great many good jobs. Instead of sparring with China over trade, the United States should dramatically increase its own investment in research and development. Only by spurring domestic innovation can the United States counter China.
That China might one day lead the world in technological innovation would have seemed laughable a generation ago. The Cultural Revolution decimated higher education in China. For a decade beginning in 1966, authorities shuttered schools and universities, sent intellectuals to labor camps, and effectively suspended scientific research. The educational system was gradually restored under Deng Xiaoping, but only in the 1990s and the first decade of this century did investment in higher education produce significant progress in science and engineering. From 1990 to 2010, Chinese enrollment in higher education rose eightfold, and the number of college graduates exploded from 300,000 to nearly three million per year. Over the same time period, China’s share of total world higher educational enrollment increased from 6 to 17 percent. In 2017, eight million students graduated from Chinese universities. By comparison, roughly three million students graduated from U.S. universities that year.
Nothing illustrates the power of technological innovation better than the last hundred years of U.S. history.
The quality of scientific education in China can be debated, but the numbers cannot. In 1990, the United States graduated 20 times more science and engineering Ph.D.’s than did China. Just two decades later, China overtook the United States on that metric, minting 29,000 new Ph.D.’s in 2010 to the United States’ 25,000. Chinese universities are still weaker than their U.S. counterparts, but the gap is closing. Six Chinese universities now rank in the top 100 global universities, according to the Times Higher Education ranking.
More scientists and more engineers add up, over time, to more innovation, especially when given adequate funding. Total worldwide spending on research and development ran about $2 trillion in 2015, the last year for which data are available. The United States accounted for roughly a quarter of that spending, down from 37 percent in 2000. China’s share was 21 percent of world R & D spending, or $408.8 billion, up from $33 billion in 2000. In cutting-edge fields such as synthetic biology, clean energy, and artificial intelligence, China has quickly become an important player.
Nothing illustrates the power of technological innovation better than the last hundred years of U.S. history. In 1938, on the eve of World War II, U.S. federal and state governments together spent roughly 0.075 percent of GDP on scientific research, a miniscule amount. By 1944, federal and state (but mostly federal) governments were spending nearly 0.5 percent of GDP on science—a sevenfold increase that was used to develop radar systems, penicillin, and the atomic bomb.
The trend continued into peacetime (and into the Cold War), as the U.S. government channeled public resources into scientific research on an entirely new scale. From 1940 to 1964, federal funding for research and development increased twentyfold. At its peak in the mid-1960s, this spending amounted to roughly two percent of GDP. Modern pharmaceuticals, microelectronics, digital computers, jet aircraft, satellites, GPS, the Internet, and much more resulted from this investment. New ideas that came out of government-funded R & D blossomed into iconic companies like IBM, AT&T, and Xerox.
But in the late 1960s, government spending on research and development began a slow and steady decline. By the early 1980s, public spending on R & D had slipped to 1.2 percent of GDP and by 2017 it had fallen to just over 0.6 percent. Nine countries now outspend the United States on R & D, when measured as a share of GDP. The picture is slightly more complicated when private sector spending is taken into account, but the United States lags behind seven other countries in total public and private R & D spending. China still spends less than the United States—both in public spending and in combined public and private spending on R & D—but it is catching up fast.
The United States pioneered the fields of synthetic biology and hydrogen power, but both seem more likely to develop in China.
The private sector in the United States continues to innovate, but mostly in the kinds of software projects favored by modern venture capitalists. Outside of the life sciences, the private sector doesn’t spend much on attempting fundamental breakthroughs, such as finding new energy sources, because while new knowledge is great for the economy as a whole, it seldom pays off for the investors who fund the work. As a result, businesses have moved away from research that doesn’t have an immediate commercial application, precipitating a 60 percent decline in publications by corporate scientists between 1980 and the early 2000s.
In the promising fields of synthetic biology and hydrogen power, for example, the private sector has largely avoided the kinds of long-term investments that spawned previous breakthroughs. The United States pioneered both fields, but they seem more likely to develop in China and other countries that offer them ample support. And by 2025, China will displace the United States as the world R & D leader in pharmaceuticals, according to a recent analysis of medical research published by The Journal of the American Medical Association.
To avoid being overtaken by China, the United States should increase federal government support for scientific research as well as efforts to translate that research into products and services that can be brought to market. Government R & D spending has a remarkably high rate of social return, meaning that the benefits are spread widely throughout society. Based on recent studies of government support for civilian- and military-oriented research in the United States, Europe, and New Zealand, we estimate that a federal government commitment of $100 billion per year to R & D would help create roughly four million good new jobs. The most productive use of such funding would be to upgrade the physical infrastructure that supports science, including new laboratories, expanded graduate programs, and incubators for developing capital-intensive technologies that may take a long time to perfect.
Wherever possible, the government should look for productive ways to spread this investment around the country. Innovation increasingly takes place in a few highly concentrated hubs where talented people congregate—places such as Seattle, the San Francisco Bay Area, Los Angeles, Boston, New York City, and Washington, D.C. But with restrictive zoning and high housing prices, these hubs have become expensive and congested. Investing in places where land is cheap and people have the potential to become much more productive will help redress regional disparities in opportunity and employment, while at the same time building an advantage over international competitors by drawing more Americans into the scientific enterprise.
In our book Jump-Starting America, we identify 102 urban communities that are plausible next-generation tech hubs. Spread across 36 states in all regions of the country, these cities and towns have large populations, highly educated workers, and a low cost of living. Examples include Rochester, New York; Baton Rouge, Louisiana; and Topeka, Kansas. To turn these cities into tech hubs, the federal government should support collaboration between universities, private businesses, and local governments with the aim of making higher education more affordable, expanding practical and technical training, and creating pipelines from local educational institutions to employers. Together, these public-private consortiums could work to keep housing costs affordable by overhauling zoning law to allow for sufficient construction.
The best way to counter China is to out-invent it—and to turn inventions into products and services that people around the world want to buy. The United States was once very good at this. China’s rise should remind the United States that it can and should renew its commitment to technological and scientific advancement.