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The Innovation Economy

The banks, the carmakers, the real estate market—what will we do? Stop panicking, and consider this eight-step plan to fix the U.S. economy for the long term, says Bill George

As commencement speaker at my alma mater, Georgia Tech, this past weekend, I proposed "the innovation economy" as the best vehicle for restoring long-term growth in the U.S. Watching 565 PhD and master's degree students accept their degrees, I was struck by the remarkable diversity of these students, compared to the school I attended in the 1960s. The majority of the class of 2008 were international students or newly immigrated Americans from China, India, and Eastern European countries.

These graduates are the hope for our future—the best opportunity for the U.S. to lead the global technology revolution, start thousands of new companies, and export high-tech products.

The U.S. economy is undergoing a massive transition, but no one is focusing on how it will come out of this long tunnel. Government leaders are working on keeping us afloat, unlocking credit markets, and preparing another short-term stimulus package. But who is thinking seriously about sustaining growth by creating millions of new jobs?

The Spending Solution

The past eight years of government policies have stimulated demand to increase consumer spending with high levels of liquidity and massive debt. Asked what Americans could do to help their country following the attacks of September 11, 2001, President George W. Bush responded, "Go shopping."

In response, Americans bought expensive homes with low interest, fully financed mortgages, gas-guzzling sport-utility vehicles, and a plethora of retail merchandise, which drove them deeper into debt. To avoid 20% interest rates, they paid off credit-card debt by refinancing their homes at inflated values.

As the nation's net savings turned negative, consumers simply ran out of cash, and then the spending stopped. In spite of last spring's stimulus package, consumers can barely afford their home mortgages, much less finance a new car—even with 0% financing—and only shop for Christmas bargains at extremely large discounts.

Bailouts Won't Help

While stimulating demand, we ignored the supply side that creates new jobs. One thing is certain: We cannot undo this damage with government bailouts for the auto companies and banks. They aren't creating new jobs. They're just trying to save the jobs they have. Sustainable job growth will come only from ingenious engineers who design innovative products they can export around the globe and entrepreneurs who create the Googles (GOOG) and Genentechs (DNA) of the future.

In spite of Lou Dobbs' proclamations on CNN (TWX), the U.S. is not competitive in low-tech manufacturing. No number of trade barriers or subsidies or degree of devaluation of the U.S. dollar can change this reality. T-shirt manufacturing is not coming back to the Carolinas. With inflexible work rules and excessive benefits, the unionized plants of the industrial North are not competitive in the global world. And we cannot continue replacing high-paying manufacturing jobs with minimum wage service jobs without compressing the incomes of the middle class.

Instead, the Obama Administration should build the innovation economy by focusing on the competitive advantage the U.S. has in entrepreneurship, innovation, and creativity.

Fueled by Entrepreneurial Spirit

No other nation has our remarkable ability to foster new company formation through the creation of high technology products and innovative services. These new companies are fueled by the inherent independence and entrepreneurial spirit of the American people, supported by the world's finest graduate-level education system. They provide the exports to offset trade deficits created by importing consumer goods.

The Obama Administration should ignite new company formation as the vehicle to create tens of millions of new jobs. These new businesses should take on the nation's greatest challenges in renewable energy and the environment, health care, education, transportation, and global peace. Specifically, the Obama Administration should:

1. Increase funds for scientific discovery through the National Institutes of Health and create a parallel organization, the National Institute of Energy & Environment, to foster renewable energies that protect the environment.

2. Augment undergraduate and graduate college scholarships through National Science Foundation grants for mathematics, science, and engineering.

3. Negotiate free trade agreements throughout the Americas as well as with Asia, Africa, and the Middle East.

4. Stimulate venture capital formation with tax policies favoring long-term capital gains over short-term with a progressive scale that starts with ordinary income rates for gains created in one to two years and winds up at 10% for assets held more than seven years. This will encourage the longer-term investment required to support genuine innovation.

5. Implement Obama's campaign proposal to offer zero capital-gains tax to founders and original investors when new companies are sold.

6. Increase tenfold the H-1B visas in the technology sector and offer automatic visas and accelerated citizenship for foreign graduates who earn advanced technical degrees at U.S. institutions.

7. Expand the base of technically qualified workers by creating retraining grants for people entering technical fields,

These steps will jump-start the innovation economy by providing built-in long-term growth, redistributing wealth without punishing the wealthy, and creating millions of well-paying jobs.

It's time to get started.

Bill George, professor of management practice at Harvard Business School, is the author of two best-selling books, True North and Authentic Leadership. The former chairman and chief executive of Medtronic, he serves on the boards of ExxonMobil, Goldman Sachs, and Novartis.

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