USA – does it have an innovation and incumbency problem? | London Business School

“How do you boost economic growth? That is a question haunting the new(ish) British government of Sir Keir Starmer, along with its European counterparts. So, too, in America ahead of its presidential election. Until now, economists have focused on an obvious answer: growth rises when productivity increases, and this is usually boosted by unleashing research and development. Hence why politicians love to be photographed in telegenic factories and science parks, calling for more crowd-pleasing R&D.”

So writes the FT’s Gillian Tett in her recent article, America has an innovation and incumbency problem (FT, September 12th)

In response to Tett’s piece, London Business School’s John Mullins writes the following:

It is a brave person who attempts to decrypt the twisted skein of rhetoric that sometimes passes for debate in American public life these days. And so, kudos must go to Gillian Tett for her brave attempt to decipher what might be important to leading thinkers in a society captivated by theriocide in Springfield Ohio, or the latest thought-provoking declarations on X by the world’s foremost tech guru (America has an innovation and incumbency problem, FT, September 12, 2024).

But brush aside the distractions we must. Ms Tett has hit upon an important issue for the US that is currently being masked by the organ grinders of populism: the country’s retreat from innovation. From the humble beanery to the mega corporation, the US has thrived throughout its commitment to invention, or to use a more familiar word popularised by Austrian economist Joseph Schumpeter, ‘innovation’.

As Tett’s article notes, total American R&D has risen in recent decades, from around 2.2 per cent of GDP in the 1980s to 3.4 per cent in 2021, including a doubling of private sector R&D to 2.5 per cent of GDP. However, “increases in R&D spending on this scale ‘should have led to accelerated economic growth’; this has not occurred.” Herein lies the rub, and Ms Tett’s article once again captures the essence of this problem: that innovation is unevenly spread.

Donald Trump’s running mate, JD Vance, a former tech investor himself, brings a perhaps diabolical point of view to this debate, accusing Big Tech companies of predicting that AI could destroy humanity in order to solicit new regulations that only the largest companies could comply with. Mr. Vance’s competing visions for looser regulation on AI and a stronger accountability for Big Tech comes as no surprise, of course, given his former employer and current patron Peter Thiel’s well-known views.

But there is another important facet to this discussion that warrants attention. Tax breaks for the rich can play an important role in promoting innovation, as those having hefty fortunes like to argue vociferously on both sides of the pond. As one who, along with Thiel, has likely benefitted from the favourable treatment of carried interest to him and his fellow VC and private equity investors, however, should we not cast a jaundiced eye upon the views he expounds?