The Innovative Society

Consider this: An era of new technology, high productivity, fast growth, low inflation, great wealth--and tumultuous economic change, with stock market crashes and unexpected recessions around the globe. Sound like today's '90s? How about the entire century between 1870 and 1970? The broad sweep of modern economic history has been one of innovation and creative destruction. A Special Report by BUSINESS WEEK shows that, for the U.S., the 3%-plus growth of recent years is merely a return to the norm, not an anomaly, paving the way to a 21st Century Economy of profits and prosperity. But getting there will require a rethinking of many of the verities that Washington and global policymakers hold dear. New tools and rules will be needed in the 21st century, and this is true for individuals and companies as well as the nation as a whole.

The U.S. economy is in the early stages of a powerful new wave of innovation, not the later stages of maturity. Information technology already spawns nearly a third of all growth. Biotechnology, the next big thing, is starting to roll out new products. Nanotechnology is poised to create a new generation of miniaturized consumer electronics early in the next decade. The innovation pipeline is full of breakthroughs.

The very process of production is being revolutionized. Virtual integration is quickly replacing vertical integration as corporations use the Net to stitch together a seamless web of global suppliers, manufacturers, distributors, and customers. Take the amazing PalmPilot. The idea originated in a tiny software company, Palm Computing, now owned by 3COM. Palo Alto Design Group in California designed the product and had the parts manufactured in Taiwan. Flextronics, a subcontractor, assembled the parts in Singapore. A brilliant new product, from the minds of young software writers, on sale in less than a year from conception: It is a saga of technological brilliance, risk-taking grit, and global teamwork.

It is a quintessentially American story. Indeed, an innovative, fast-paced economy plays to America's cultural strengths. Flexibility, creativity, and optimism come naturally to an immigrant society with a frontier history, where "new" is better than "old," taking chances is valued over playing it safe, and making money is deemed superior to inheriting it.


There is, however, a price to be paid. History shows that a high-productivity, fast-growth economy is prone to greater, not fewer, shocks. Nations can rise and fall as they try to adapt to new technologies. It may be that Japan's unexpected decline was the first example of a major industrial country unable to adapt to information-age technologies, turning instead to a beggar-thy-neighbor policy of currency devaluation that helped trigger the collapse of Asian prosperity. And the ultimate success of European unification may well depend on Europe's ability to integrate technology across its borders.

One thing is certain. An innovation-led economy requires new policies and new politics. Traditional liberal or conservative solutions to problems based on an industrial-era paradigm won't work. The real political split today in the U.S. is between innovation optimists who see an exuberant, fast-growing nation actively bestriding the global scene, and those who subscribe to a cramped view of the economy's potential and the role the country should play around the world.


This is what is needed to promote a pro-innovation growth strategy for the U.S. in the 21st century:

-- TAXES. Less is more. People must retain the rewards of their work and risk. Tax cuts should be focused on creating wealth. That means marginal tax rates should be cut in preference to rewarding core constituencies. As for the Net, it should remain totally tax-free for as long as possible.

-- REGULATION. Less and more are both needed. Entrepreneurs must be free to develop and sell products and services. That means cutting back the jungle of regs and curbing wild litigiousness. But in the frontier spaces of the Net, just the opposite is required. Rules must be drawn up on a whole range of issues, from electronic commerce to encryption. Private citizens get first crack, as they did on the Western frontier. If they fail, then the Texas Rangers must step in.

-- EDUCATION. No panic is called for. The same education system blamed for the poor economic performance of the '80s now supports the exceptional expansion of the '90s. Truth is, there are many education systems in America. University education is the best in the world. Suburban schools are generally good. Urban private schools are good to exceptional. Only urban public schools are in serious trouble. The solutions are obvious: national standards, charter schools, more money, and, if urban public schools still don't work, vouchers. Period.

-- TRADE. An open, vibrant, global economy is critical. Rising real wages and low unemployment prove it. Pass fast-track. But strongly insist that overseas countries open their markets if they want to sell in the U.S.

-- IMMIGRATION. It's the lifeblood of innovation and entrepreneurship. Shift to a system favoring education instead of family ties. Raise temporary high-tech visa quotas.

-- RESEARCH. Spend more on basic research in universities and increase support for students in engineering and sciences.

-- SAFETY NET. It's a high-risk society. Faster growth and a budget surplus will save Social Security and Medicare, but medical insurance for all and portable pensions need work.

Above all, the U.S. must recognize that an innovation-led global economy cannot prosper without sweeping reform of international financial institutions. Today the IMF is acting like the Fed of the 1930s--mistakenly tightening into a deflationary recession, threatening a global credit crunch. That is precisely what turned the 1930s into an economic nightmare. As the global economy moves into the 21st century, it is the one mistake that must be avoided at all costs.

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