Coupled with America’s unique innovation-generating machines—universities, public and private research labs, and retailers—we have the best-regulated and most efficient capital markets in the world for taking new ideas and turning them into products and services. Dick Foster, director of McKinsey & Co. and the author of two books on innovation, remarked to me, “We have an ‘industrial policy’ in the U.S.—it is called the stock exchange, whether it is the NYSE or the Nasdaq.” That is where risk capital is collected and assigned to emerging ideas or growing companies, Foster said, and no capital market in the world does that better and more efficiently than the American one.
What makes capital provision work so well here is the security and regulation of our capital markets, where minority shareholders are protected. Lord knows, there are scams, excesses, and corruption in our capital markets. That always happens when a lot of money is at stake. What distinguishes our capital markets is not that Enrons don’t happen in America—they sure do. It is that when they happen, they usually get exposed, either by the Securities and Exchange Commission or by the business press, and get corrected. What makes America unique is not Enron but Eliot Spitzer, the attorney general of New York State, who has doggedly sought to clean up the securities industry and corporate boardrooms. This sort of capital market has proved very, very difficult to duplicate outside of New York, London, Frankfurt, and Tokyo. Said Foster, “China and India and other Asian countries will not be successful at innovation until they have successful capital markets, and they will not have successful capital markets until they have rule of law which protects p. 246 minority interests under conditions of risk . . . We in the U.S. are the lucky beneficiaries of centuries of economic experimentation, and we are the experiment that has worked.”
While these are the core secrets of America’s sauce, there are others that need to be preserved and nurtured. Sometimes you have to talk to outsiders to appreciate them, such as Indian-born Vivek Paul of Wipro. “I would add three to your list,” he said to me. “One is the sheer openness of American society.” We Americans often forget what an incredibly open, say-anything-do-anything-start-anything-go-bankrupt-and-start-anything-again society the United States is. There is no place like it in the world, and our openness is a huge asset and attraction to foreigners, many of whom come from countries where the sky is not the limit.
Another, said Paul, is the “quality of American intellectual property protection,” which further enhances and encourages people to come up with new ideas. In a flat world, there is a great incentive to develop a new product or process, because it can achieve global scale in a flash. But if you are the person who comes up with that new idea, you want your intellectual property protected. “No country respects and protects intellectual property better than America,” said Paul, and as a result, a lot of innovators want to come here to work and lodge their intellectual property.
The United States also has among the most flexible labor laws in the world. The easier it is to fire someone in a dying industry, the easier it is to hire someone in a rising industry that no one knew would exist five years earlier. This is a great asset, especially when you compare the situation in the United States to inflexible, rigidly regulated labor markets like Germany’s, full of government restrictions on hiring and firing. Flexibility to quickly deploy labor and capital where the greatest opportunity exists, and the ability to quickly redeploy it if the earlier deployment is no longer profitable, is essential in a flattening world.
Still another secret to America’s sauce is the fact that it has the world’s largest domestic consumer market, with the most first adopters, in the world, which means that if you are introducing a new product, technology, or service, you have to have a presence in America. All this means a steady flow of jobs for Americans.
p. 247 There is also the little-discussed American attribute of political stability. Yes, China has had a good run for the past twenty-five years, and it may make the transition from communism to a more pluralistic system without the wheels coming off. But it may not. Who would want all his or her eggs in that basket?
Finally, the United States has become one of the great meeting points in the world, a place where lots of different people bond and learn to trust one another. An Indian student who is educated at the University of Oklahoma and then gets his first job with a software firm in Oklahoma City forges bonds of trust and understanding that are really important for future collaboration, even if he winds up returning to India. Nothing illustrates this point better than Yale University’s outsourcing of research to China. Yale president Richard C. Levin explained to me that Yale has two big research operations running in China today, one at Peking University in Beijing and the other at Fudan University in Shanghai. “Most of these institutional collaborations arise not from top-down directives of university administrators, but rather from long-standing personal relationships among scholars and scientists,” said Levin.
How did the Yale-Fudan collaboration arise? To begin with, said Levin, Yale professor Tian Xu, its director, had a deep affiliation with both institutions. He did his undergraduate work at Fudan and received his Ph.D. from Yale. “Five of Professor Xu’s collaborators, who are now professors at Fudan, were also trained at Yale,” explained Levin. One was Professor Xu’s friend when both were Yale graduate students; another was a visiting scholar in the laboratory of a Yale colleague; one was an exchange student who came to Yale from Fudan and returned to earn his Ph.D. in China; and the other two were postdoctoral fellows in Professor Xu’s Yale lab. A similar story underlies the formation of the Peking-Yale Joint Center for Plant Molecular Genetics and Agrobiotechnology.
Professor Xu is a leading expert on genetics and has won grants from the National Institutes of Health and the Howard Hughes Foundation to study the connection between genetics and cancer and certain neuro-degenerative diseases. This kind of research requires the study of large numbers of genetic mutations in lab animals. “When you want to test many genes and trace for a given gene that may be responsible for cerp. 248tain diseases, you need to run a lot of tests. Having a bigger staff is a huge advantage,” explained Levin. So what Yale did was essentially outsource the lab work to Fudan by creating the Fudan-Yale Biomedical Research Center. Each university pays for its own staff and research, so no money changes hands, but the Chinese side does the basic technical work using large numbers of technicians and lab animals, which cost so much less in China, and Yale does the high-end analysis of the data. The Fudan staff, students, and technicians get great exposure to high-end research, and Yale gets a large-scale testing facility that would have been prohibitively expensive if Yale had tried to duplicate it in New Haven. A support lab in America for a project like this one might have 30 technicians, but the one in Fudan has 150.
“The gains are very much two-way,” said Levin. “Our investigators get substantially enhanced productivity, and the Chinese get their graduate students trained, and their young faculty become collaborators with our professors, who are the leaders in their fields. It builds human capital for China and innovation for Yale.” Graduate students from both universities go back and forth, forging relationships that will no doubt produce more collaborations in the future. At the same time, he added, a lot of legal preparation went into this collaboration to make sure that Yale would be able to harvest the intellectual property that is created.
“There is one world of science out there,” said Levin, “and this kind of international division of labor makes a lot of sense.” Yale, he said, also insisted that the working conditions at the Chinese labs be world-class, and, as a result, it has also helped to lift the quality of the Chinese facilities. “The living conditions of the lab animals are right up to U.S. standards,” remarked Levin. “These are not mouse sweatshops.”
Every law of economics tells us that if we connect all the knowledge pools in the world, and promote greater and greater trade and integration, the global pie will grow wider and more complex. And if Americ
a, or any other country, nurtures a labor force that is increasingly made up of men and women who are special, specialized, or constantly adapting to higher-value-added jobs, it will grab its slice of that growing pie. But p. 249 we will have to work at it. Because if current trends prevail, countries like India and China and whole regions like Eastern Europe are certain to narrow the gap with America, just as Korea and Japan and Taiwan did during the Cold War. They will keep upping their standards.
So are we still working at it? Are we tending to the secrets of our sauce? America still looks great on paper, especially if you look backward, or compare it only to India and China of today and not tomorrow. But have we really been investing in our future and preparing our children the way we need to for the race ahead? See the next chapter. But here’s a quick hint:
The answer is no.
Seven: The Quiet Crisis
p. 250 Close games for the Americans were rare in previous Olympics, but now it appears to be something the Americans should get used to.
—From an August 17, 2004, AP article from the Athens Olympics titled “U.S. Men’s Basketball Team Narrowly Beats Greece”
You could find no better metaphor for the way the rest of the world can now compete head-to-head more effectively than ever with America than the struggles of the U.S. Olympic basketball team in 2004. The American team, made up of NBA stars, limped home to a bronze medal after losing to Puerto Rico, Lithuania, and Argentina. Previously, the United States Olympic basketball team had lost only one game in the history of the modern Olympics. Remember when America sent only NCAA stars to the Olympic basketball events? For a long time these teams totally dominated all comers. Then they started getting challenged. So we sent our pros. And they started getting challenged. Because the world keeps learning, the diffusion of knowledge happens faster; coaches in other countries now download American coaching methods off the Internet and watch NBA games in their own living rooms on satellite TV. Many of them can even get ESPN and watch the highlight reels. And thanks to the triple convergence, there is a lot of new raw talent walking onto the NBA courts from all over the world—including many new stars from China, Latin America, and Eastern Europe. They go back and play for their national teams in the Olympics, using the skills they honed p. 251 in America. So the automatic American superiority of twenty years ago is now gone in Olympic basketball. The NBA standard is increasingly becoming a global commodity—pure vanilla. If the United States wants to continue to dominate in Olympic basketball, we must, in that great sports cliché, step it up a notch. The old standard won’t do anymore. As Joel Cawley of IBM remarked to me, “Star for star, the basketball teams from places like Lithuania or Puerto Rico still don’t rank well versus the Americans, but when they play as a team—when they collaborate better than we do—they are extremely competitive.”
Sports writer John Feinstein could have been referring to either American engineering skills or American basketball skills when he wrote in an August 26, 2004, AOL essay on Olympic basketball that the performance of the U.S. basketball team is a result of “the rise of the international player” and “the decline and fall of the U.S. game.” And the decline and fall of the U.S. game, argued Feinstein, is a result of two long-term trends. The first is a steady decline “in basketball skills,” with American kids just wanting to shoot either three-point shots or dunk—the sort of stuff that gets you on ESPN’s SportsCenter highlight reel—instead of learning how to make precise passes, or go into the lane and shoot a pull-up jumper, or snake through big men to get to the basket. Those skills take a lot of hard work and coaching to learn. Today, said Feinstein, you have an American generation that relies almost completely on athleticism and almost not at all on basketball skills. And there is also that ugly little problem of ambition. While the rest of the world was getting better in basketball, “more and more NBA players were yawning at the notion of playing in the Olympics,” noted Feinstein. “We have come a long way from 1984, when Bob Knight told Charles Barkley to show up to the second Olympic training camp at 265 pounds or else. Barkley showed up weighing 280. Knight cut him that day. In today’s world, the Olympic coach wouldn’t even have checked Barkley’s weight in the first place. He would have sent a limousine to the airport to get him and stopped at Dunkin’ Donuts on the way to the hotel if the player requested it . . . The world changes. In the case of American basketball, it hasn’t changed for the better.”
There is something about post-World War II America that reminds p. 252 me of the classic wealthy family that by the third generation starts to squander its wealth. The members of the first generation are nose-to-the-grindstone innovators; the second generation holds it all together; then their kids come along and get fat, dumb, and lazy and slowly squander it all. I know that is both overly harsh and a gross generalization, but there is, nevertheless, some truth in it. American society started to coast in the 1990s, when our third postwar generation came of age. The dot-com boom left too many people with the impression that they could get rich without investing in hard work. All it took was an MBA and a quick IPO, or one NBA contract, and you were set for life. But while we were admiring the flat world we had created, a lot of people in India, China, and Eastern Europe were busy figuring out how to take advantage of it. Lucky for us, we were the only economy standing after World War II, and we had no serious competition for forty years. That gave us a huge head of steam but also a huge sense of entitlement and complacency—not to mention a certain tendency in recent years to extol consumption over hard work, investment, and long-term thinking. When we got hit with 9/11, it was a once-in-a-generation opportunity to summon the nation to sacrifice, to address some of its pressing fiscal, energy, science, and education shortfalls—all the things that we had let slide. But our president did not summon us to sacrifice. He summoned us to go shopping.
In the previous chapters, I showed why both classic economic theory and the inherent strengths of the American economy have convinced me that American individuals have nothing to worry about from a flat world—provided we roll up our sleeves, be ready to compete, get every individual to think about how he or she upgrades his or her educational skills, and keep investing in the secrets of the American sauce. Those chapters were all about what we must do and can do.
This chapter is about how we Americans, individually and collectively, have not been doing all these things that we should be doing and what will happen down the road if we don’t change course.
The truth is, we are in a crisis now, but it is a crisis that is unfolding very slowly and very quietly. It is “a quiet crisis,” explained Shirley p. 253 Ann Jackson, the 2004 president of the American Association for the Advancement of Science and president of Rensselaer Polytechnic Institute since 1999. (Rensselaer is America’s oldest technological college, founded in 1824.) And this quiet crisis involves the steady erosion of America’s scientific and engineering base, which has always been the source of American innovation and our rising standard of living.
“The sky is not falling, nothing horrible is going to happen today,” said Jackson, a physicist by training who chooses her words carefully. “The U.S. is still the leading engine for innovation in the world. It has the best graduate programs, the best scientific infrastructure, and the capital markets to exploit it. But there is a quiet crisis in U.S. science and technology that we have to wake up to. The U.S. today is in a truly global environment, and those competitor countries are not only wide awake, they are running a marathon while we are running sprints. If left unchecked, this could challenge our preeminence and capacity to innovate.”
And it is our ability to constantly innovate new products, services, and companies that has been the source of America’s horn of plenty and steadily widening middle class for the last two centuries. It was American innovators who started Google, Intel, HP, Dell, Microsoft, and Cisco, and it matters where innovation happens. The fact that all these companies are headquartered in America means that most of the high-paying jobs are here, even
if these companies outsource or offshore some functions. The executives, the department heads, the sales force, and the senior researchers are all located in the cities where the innovation happened. And their jobs create more jobs. The shrinking of the pool of young people with the knowledge skills to innovate won’t shrink our standard of living overnight. It will be felt only in fifteen or twenty years, when we discover we have a critical shortage of scientists and engineers capable of doing innovation or even just high-value-added technology work. Then this won’t be a quiet crisis anymore, said Jackson, “it will be the real McCoy.”
Shirley Ann Jackson knows of what she speaks, because her career exemplifies as well as anyone’s both why America thrived so much in the past fifty years and why it won’t automatically do the same in the next p. 254 fifty. An African-American woman, Jackson was born in Washington, D.C., in 1946. She started kindergarten in a segregated public school but was one of the first public school students to benefit from desegregation, as a result of the Supreme Court ruling in Brown v. Board of Education. Just when she was getting a chance to go to a better school, the Russians launched Sputnik in 1957, and the U.S. government became obsessed with educating young people to become scientists and engineers, a trend that was intensified by John F. Kennedy’s commitment to a manned space program. When Kennedy spoke about putting a man on the moon, Shirley Ann Jackson was one of the millions of American young people who were listening. His words, she recalled, “inspired, assisted, and launched many of my generation into science, engineering and mathematics,” and the breakthroughs and inventions they spawned went well beyond the space program. “The space race was really a science race,” she said.
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