After the Stimulus

With the nation’s economy on the brink of cardiac arrest last week, the “emergency stimulus” doctors in Washington reached for the defibrillator to jolt consumers and businesses back to life. But even if we manage to stabilize the ailing economy, should we really discharge the patient without a longer-term health plan?

Converging trends suggest that unless we also focus on improving America’s future economic prospects, we could be back in intensive care sooner than we think:

• The rapid growth occurring in rising economies such as China, India, and Eastern Europe portends heightened global competition for investment and jobs, and continued restructuring of America’s traditional manufacturing base, even with a falling dollar.
• As a recent Congressional Budget Office (CBO) report details, the growth of our nation’s labor force will slow sharply with the impending retirement of the Baby Boomers, and the “maxing out” of women’s labor market participation. CBO projects that this will cause a slowdown in our economy’s potential output relative to long-term trends.
• Meeting our nation’s financial obligations to a growing pool of retired Americans, meanwhile, will require that our economy grow at a robust rate over the longer term. Modest reforms to Social Security and Medicare will help, but the rate of economic growth will significantly affect the efficacy of those reforms.
• Moreover, the character of recent economic growth—massive gains at the top of the income distribution accompanied by stagnation or losses at the middle and bottom—could threaten the political consensus for trade, investment, and labor market policies aimed at securing greater long-term growth.

Unfortunately, but predictably, we’re hearing much less from Capitol Hill and the campaign trail about how we should grapple with these looming economic challenges, than about the comparatively easy business of issuing rebate checks over the next few months.

The stimulus debate has been influenced heavily by a call for the “three Ts”—measures that are timely, targeted, and temporary.

Policies to improve our nation’s long-run economic performance, on the other hand, would do well to focus on the “three Is”—innovation, intellect, and infrastructure.

Innovation, the translation of new ideas into new products, processes, and business models, has always served to propel economic growth. Increased market integration, increased speed of information flows and economic transactions, and increased American dependence on high-value services exports suggest that innovation is more important than ever to future U.S. productivity growth. Indeed, our nation’s ability to continuously innovate will be a competitive advantage at a time when developing nations such as China and India can offer firms significant labor cost advantages. Yet America has fallen behind European competitors in innovative new-growth fields like alternative energy, where none of the world’s ten largest solar-cell manufacturers, and only one of the world’s ten largest wind-turbine manufacturers, is a U.S. company.

Intellect, the knowledge and skills of our people, translates into economic growth by raising both output and incomes (by improving worker efficiency, or growing and retaining jobs in high-value industries). More intellect gets us more of the first “I,” innovation. Our nation’s most highly educated workers have seen the highest wage gains over recent decades—especially those workers who specialize in tasks needed in evolving technologies. Strategic investments to grow our nation’s intellect can help offset the downsides of economic growth by narrowing educational disparities and reducing income inequality. Yet while the United States sends the highest share of its young people to college worldwide, our rank falls to 16th in the share who actually go on to complete a degree.

Infrastructure, supports long-term economic growth in many ways. High-quality transportation infrastructure, such as roads, transit, rail, and ports, speeds the movement of goods and people within and across markets. This facilitates greater investment, promotes labor market flexibility, and opens up new domestic and international product markets. Yet so many of our major transportation gateways remain stuck in traffic, with problems only expected to grow worse—the Department of Energy projects a 59 percent rise in vehicle miles traveled between 2005 and 2030, more than double the 23 percent projected increase in population over that period.

The federal government plays an important role in shaping our economy’s innovative capacity, through direct investments in science and health research, financial support for public and private research institutions, and favorable tax treatment for corporate investment in R&D. On intellect, the federal government subsidizes higher education and job training for millions of Americans each year, and sets the performance context for children in lower grades through the No Child Left Behind Act. And on infrastructure, the federal government is heavily involved, spending roughly $50 billion annually to maintain and upgrade our transportation network.

A sharper focus on improving the “three Is” should naturally lead us to the places where our nation’s innovation, intellect and infrastructure are centered: its major metropolitan areas.

As I noted in the Brookings Institution’s recent report, MetroNation, the 100 largest U.S. metropolitan areas, interwoven networks of cities and suburbs that constitute our nation’s largest regional economies, contain 65 percent of our population but generate outsized shares of our innovation, intellect, and infrastructure. They account for 74 percent of the nation’s college graduates, 76 percent of all good-paying “knowledge economy” jobs, 78 percent of all patent activity, 79 percent of all U.S. air cargo, 82 percent of federal research funding, and 94 percent of venture capital investments. Not surprisingly, these 100 metro areas alone generate three-fourths of U.S. Gross Domestic Product.

A meaningful effort to secure long-term U.S. economic prosperity, then, must be forged in the metropolitan economies that gather—and indeed strengthen—the “three Is.” Brookings is offering new ideas along these lines in our
Blueprint for American Prosperity
initiative, advancing an agenda to promote more productive, inclusive, and sustainable economic growth in our metropolitan areas, and thus nationwide.

As the debate over the size and shape of the stimulus package dies down, then, presidential candidates and Congressional leaders should articulate how Washington can promote smarter investment in the “three Is,” together with partners at other levels of government and in the private sector. For instance, could the federal government:

• Organize its often diffuse efforts to stimulate innovation in a more focused, purposeful way that catalyzes private-sector productivity and job growth in cutting-edge fields?
• Back emerging state, local, and private-sector efforts to provide students with financial guarantees for higher education, an indispensable asset in the 21st-century economy?
• Get serious about resolving the key competitive challenges facing our national transportation network, by augmenting existing state programs with performance and accountability measures, and by targeting funds to gateways and corridors of critical importance to the nation?

Like any doctor’s prescription for treating chronic heart problems (“Eat better and exercise”), grappling with the “three Is” is hardly as sexy as the emergency-room stuff of the “three Ts.” But once we get past the stimulus frenzy, let’s have a real debate about the blueprint for bolstering America’s long-term economic growth—and, by extension, the capacity of its major metropolitan areas to foster greater innovation, intellect, and high-performance infrastructure.

Otherwise, we’ll see you back on the operating table in a few years.