Recent global events, both economic and political, have us thinking a lot about the United States’ competitive standing in the world today. How has the economic landscape changed these past few years, and do we have what it takes to keep up?
Two factors determine a country’s economic growth rate. The first, the growth of your labor force, is largely determined by your population growth rate. On this front, there is some bad news and some good news; the bad news is that the U.S. population is growing less that 1% per year. The good news is that we are not alone here. Many nations today, including most of the developed world and China, suffer from this problem.
The productivity rate (the output produced per hour of work) is the second determinant of economic growth. Apart from some recent COVID-related distortions, our productivity rate has been anemic over the past decade, averaging about 1% per year. Going forward, we will need to be more productive if we are going to offset the economic drag caused by our aging workforce. This will require both money and smarts to invest in innovative technologies and processes. Let’s see how we are doing in these two areas today.
The U.S. continues to lead the world in overall R&D spending. Up until the mid-1960s, the Federal government funded most of the outlays. Its share has declined consistently since then and as of 2020, totaled less than 25% of the $713 billion that was spent overall. As a percent of our budget, Federal spending fell from approximately 12% in the 1970s to just 3% today. The private sector has picked up the slack and as of 2020 funded 70% of the total. The nation’s technology titans have most recently led a surge in spending. In 2021, the “Big Five” (Amazon, Apple, Google, Microsoft, and Meta) spent $149 billion on R&D, or roughly 25% of the nation’s total. These funds targeted areas such as robotics, fintech, healthcare, space flight, and cryptocurrencies. Some of these investments will have an immediate impact on productivity, but many are higher risk bets that could take years to pay off.
Unfortunately, moving the productivity “needle” is not just about spending more money. Other “inputs,” such as the quality of your workforce are critical to fostering innovations. The World Intellectual Property Organization, an agency of the United Nations, has been examining these inputs and ranking countries on their capacity for, and success in, innovation since 2007 (see Global Innovation Index chart below). Their ranking methodology utilizes over 80 indicators including those relating to human capital, infrastructure, business sophistication, and the strength of existing institutions. “Outputs,” which include the results of innovation (e.g. technology-based products), are also factored into the mix. Not surprisingly, several rich, developed nations including the U.S. top the list. Four Asian economies feature in the top 15, including Singapore (8), China (12), Japan (13), and Hong Kong (14). China has shown some of the most improvement, breaking into the top 15 in 2019. These shifting rankings suggest that while our spot near the top of the list is impressive, it is not secure. The U.S. has key advantages such as the quality of its universities and being home to many of the world’s leading R&D-intensive global companies. But China, which boasts 19 of the top science and technology “clusters,” and a number of other countries are clearly on the move.