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Yet for all their outsized presence, they have been puny as engines of job creation. Over the past twenty years, multinationals have accounted for 41 percent of all gains in U.S. labor productivity—but just 11 percent of the gains in private-sector employment. And in
the past decade, that picture has grown uglier: according to the economist Martin Sullivan, from 1999 through 2008, U.S. multinationals shrank their domestic workforce by about 1.9 million, while increasing foreign employment by about 2.4 million.

The heavy footprint of multinational companies is merely one sign of how inseparable the U.S. economy has become from the larger global economy. Still, these figures neatly illustrate two larger points. First, we can’t wish away globalization or turn our backs on trade; to try to do so would be crippling and impoverishing. And second, something has nonetheless gone wrong with the way America’s economy has evolved in response to increasingly dense global connections, especially in the past decade.

Particularly since the 1970s, the United States has placed its bets on continuous innovation, accepting the rapid transfer of production to other countries as soon as products mature and their manufacture becomes routine, all with the idea that the creation of new products and services will more than make up for that outflow. The nation has nearly always benefited from its orientation toward the future, rather than the past, and from its entrepreneurialism and readiness to adapt. This strategy is very much in keeping with those core precepts, and at times it has paid off big. Rapid innovation in the 1990s allowed the economy to grow quickly and create good, new jobs up and down the ladder to replace those that were obsolescing or moving overseas. Yet in recent years, that process has broken down.

One reason, writes the economist Michael Mandel, is that America no longer enjoys the economic fruits of new innovation for as long as it used to. Knowledge, R&D, and business know-how depreciate more quickly now than they did even fifteen years ago, because global communication is faster, connections more seamless, and human capital more broadly diffused than in the past. Mandel writes:

The product cycle—with initial production in the richest and most innovative places, then moving eventually to lower-labor-cost countries—has sped up in recent decades, and domestic production booms have ended sooner. (IT-hardware production, for instance, which in 1999 the Bureau of Labor Statistics projected would create about 155,000 new jobs over the following decade, actually shrank by nearly 500,000 jobs. Jobs in data processing also fell, presumably as a result of both offshoring and technological advance.) Because innovations depreciate faster, we need more of them than we used to in order to sustain the same rate of economic growth.

Yet in the aughts, as an array of prominent economists and entrepreneurs have recently pointed out, the rate of big innovations actually slowed considerably; with the housing bubble fueling easy growth for much of that time, we just didn’t notice. This slowdown may have merely been the result of bad luck—big breakthroughs of the sort that create whole categories of products or services are difficult to predict, and long droughts are not unknown. Overregulation in certain areas may also have played a role. The Columbia University professors Edmund Phelps and Leo Tilman point to a patent system that’s become stifling; an increasingly myopic focus among public companies on quarterly results, rather than long-term value creation; and, not least, a financial industry that for a generation has focused its talent and resources not on funding business innovation but on proprietary trading, regulatory arbitrage, and arcane financial engineering. The economist Tyler Cowen, in his 2011 book,
The
Great Stagnation
, argues that the scientific frontier itself—or at least that portion of it that leads to commercial innovation—has been moving outward more slowly, and requiring ever-more resources to do so, for many decades, and that we’ve now plucked most of the low-hanging fruit from major advances deep in the past.

Process
innovation has been quite rapid in recent years. U.S. multinationals and other companies are very good at continually improving their operational efficiency by investing in IT, restructuring operations, and shifting work around the globe. Some of these activities benefit some U.S. workers, by making the jobs that stay in the country more productive. But absent big breakthroughs that lead to new products or services—and given the vast reserves of low-wage but increasingly educated labor in China, India, and elsewhere—rising operational efficiency hasn’t been a recipe for strong growth in either jobs or common wages in the United States. New products and services are extremely important to the future of the economy.

America has huge advantages as an innovator. Innovative clusters like Silicon Valley, North Carolina’s Research Triangle, and the Massachusetts high-tech corridor are difficult to replicate, and the United States has many of them.
Foreign students still flock here, and foreign engineers and scientists who get their doctorates here have been staying on for longer and longer over the past fifteen years. When you compare apples to apples, the United States still leads the world, handily, in the number of skilled engineers, scientists, and business professionals in residence.

But we need to better harness those advantages to speed the pace of innovation, in part by putting a much higher national priority on investment—rather than consumption—in the coming years. Among other things, that means substantially raising and broadening both national and private investment in basic scientific progress and in later-stage R&D—through a combination of more federal investment in scientific research, perhaps bigger tax breaks for private R&D spending, and a much lower corporate tax rate (and a simpler corporate tax code) overall. Phelps and Tilman have proposed
the creation of a National Innovation Bank that would invest in, or lend to, innovative start-ups—bringing more money to bear than venture-capital funds could, and at a lower cost of capital, which would promote more investment and enable the funding of somewhat riskier ventures. (The broader idea behind such a bank is that because innovation carries so many ambient benefits—from job creation to the experience gained by even failed entrepreneurs and the people around them—we should be willing to fund it more liberally as a society than private actors would individually.)

Putting more public money into research and innovation of course means putting less of it elsewhere—one more reason why institutionalizing greater budget discipline and continuing the reform of entitlements like Medicare is so critical. And even as we invest more in scientific progress and new business breakthroughs, we need to recognize that because the benefits of innovation diffuse more quickly now, the return on such national investment may be lower than it was in previous decades. Despite these drawbacks and tradeoffs, the alternative to heavier investment is dismal to contemplate.

Removing bureaucratic obstacles to innovation is at least as important as pushing more public funds toward it. As Wall Street has amply demonstrated, not every industry was overregulated in the aughts. Nonetheless, the decade did see the accretion of a number of well-intentioned regulatory measures that may have chilled the investment climate (
the Sarbanes-Oxley accounting reforms and a proliferation of costly security regulations following the creation of the Department of Homeland Security are two prominent examples).

Regulatory balance is always difficult in practice, but Mandel has suggested a couple of useful rules of thumb. One is that where new and emerging industries are concerned—industries at the forefront of the economy that could provide big bursts of growth—our bias should be toward light regulation where possible, allowing creative experimentation and encouraging rapid growth. (A corollary is that we should be careful not to overburden young, small companies in particular. The Sarbanes-Oxley reforms, for instance, are especially
punishing to newer firms, which do not have the same resources to put toward documentation of compliance that larger, more established ones do.)
The growth of the Internet in the 1990s is a good example of the benefit that can come from a light regulatory hand early on in an industry’s growth; green technology, wireless platforms, and social-networking technologies are perhaps worthy of similar treatment today.

A second rule of thumb is that our regulatory bias should be countercyclical. In times like these, when growth is depressed and companies are hesitant to invest anyway, we should, on the margins, lean toward lighter regulation.
In periods of strong growth—when exuberance and the easy availability of investment capital, along with the inattentiveness that typically accompanies both, can inspire mischief—the government should tend toward a more aggressive approach.

One of the cheapest, fastest, and most leveraged actions we can take to increase the country’s innovative capacity is to simply let in a larger number of creative, highly educated, highly skilled immigrants each year. The United States remains tremendously attractive to entrepreneurial and technically skilled foreigners around the globe, but not many are allowed to work here.
Only about 65,000 H-1B visas for highly skilled foreign workers are available each year, along with another 20,000 for those who have an advanced degree from a U.S. university. The supply of willing workers is of course far larger, and so is the demand from U.S. companies. We should vastly increase the number of these visas, ease the path to permanent residency, and create new avenues for foreign entrepreneurs and scientists to relocate here.
One group of venture capitalists has suggested a new sort of visa, a “start-up visa,” open to any foreigner who has a business idea that a U.S. venture-capital firm is willing to fund; a bill based on this idea, the StartUp Visa Act, is before Congress at the time of this writing. We should pass it.

Most important, of course, an innovation economy depends on an excellent education system and a highly educated workforce—both
historic advantages of the United States that are now diminishing relative to other countries. Improving educational attainment in the United States is essential to keeping America at the forefront of the global economy, and ensuring that high-quality educational opportunities are available to everyone is an imperative social goal.

Over the past decade, the country has taken some good steps toward fixing the problems with its educational system, though more are needed. Commitments to excellence and access beginning even in preschool; to meeting clear standards, school by school; to school choice and experimentation with different educational models; and to subjecting teachers to the same consequences for poor performance that nearly every other American worker faces—all of these measures are crucial to improving the nation’s human capital and enabling strong growth in the long run.
A special focus on improving the educational opportunities of disadvantaged children is essential: more than half of the children from high-income families graduate from college in the United States; just 11 percent of those from low-income families do the same.

Finally, as we strive toward faster innovation, we also need to prevent the production of new, high-value goods from leaving American shores too quickly. Protectionist measures are generally self-defeating, and can prompt larger trade wars. And while vigilance against the theft of intellectual property and strong sanctions when such theft is discovered are sensible, they are unlikely to alter the basic trends of technological and knowledge diffusion. (Much of that diffusion is entirely legal, and the long history of industrialization and globalization suggests that attempts to halt it will fail.) What
can
really matter economically is a fair exchange rate. Throughout much of the aughts and continuing to the present day, China, in particular, has taken extraordinary measures to keep its currency undervalued relative to the dollar, and this has harmed U.S. industry. We must press China on currency realignment, putting sanctions on the table if necessary.

Given some of the workforce trends of the past decade, doubling
down on technology,
innovation, and globalization may seem counterintuitive. And indeed, this strategy is no cure-all. Too often, it has been viewed as the beginning and end of what we need to do as a nation to ensure a broadly shared prosperity. We are right to view it as the beginning; without a vibrant, innovative economy, all other prospects dim. But even in boom times, many more people than we would care to acknowledge won’t have the education, skills, or abilities to prosper in a pure and globalized market, shaped by enormous labor reserves in China, India, and other developing countries. Over the next couple of decades or more, even if national economic growth is strong, what we do to help and support moderately educated Americans may well determine whether the United States remains a middle-class country.

In
The Race Between Education and Technology
, the economists Claudia Goldin and Lawrence Katz make a compelling argument that throughout roughly the first three-quarters of the twentieth century, most Americans prospered and inequality fell because while technological advance was rapid—and mostly biased toward people with relatively advanced skills—educational advance was faster still; the pool of people who could take advantage of new technologies kept growing larger, while the pool who could not stayed relatively small. Elementary education had become free and accessible to most citizens in the nineteenth century, and high-school participation and graduation rose meteorically in the first half of the twentieth; a rise, initially rapid, in college completion followed in short order.