Scientific Talent and U.S. Economic Leadership
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For the past half century, the United States has been the world’s scientific and technological leader: American multinationals are at the forefront of commercial technologies; U.S. exports are disproportionately from sectors that rely extensively on scientific and engineering workers; leading-edge technologies play an important role in sustaining rapid U.S. productivity growth; and technological prowess is a key source of U.S. military might. But much evidence points to an erosion of U.S. dominance in science and engineering. The American share of science and engineering graduates is declining rapidly, and new centers of technological excellence are forming in Europe and Asia. What do these developments portend for U.S. economic leadership? How should the United States respond to an erosion of its technological dominance?

These and other questions will be addressed by Professor Richard Freeman of Harvard University. Mr. Freeman will draw on his recent study, “Does Globalization of the Scientific/Engineering Workforce Threaten U.S. Economic Leadership?” Professor David Weinstein of Columbia University and AEI visiting scholar Steven J. Davis will respond. Kevin A. Hassett, AEI’s director of economic policy studies, will moderate.

Agenda
2:15 p.m.
Registration
2:30
Presenter:
Richard B. Freeman, Harvard University
Discussants:
Steven J. Davis, AEI
David E. Weinstein, Columbia University
Moderator:
Kevin A. Hassett, AEI
4:30
Adjournment
Event Summary

March 2006

Scientific Talent and U.S. Economic Leadership

Panelists at a March 20 AEI conference noted how the United States has been the world’s scientific and technological leader for the past half-century. American multinationals are at the forefront of commercial technologies, U.S. exports are disproportionately from sectors that rely extensively on scientific and engineering workers, leading-edge technologies play an important role in sustaining rapid U.S. productivity growth, and technological prowess is a key source of U.S. military might. But much evidence points to an erosion of U.S. dominance in science and engineering. The American share of science and engineering graduates is declining rapidly, and new centers of technological excellence are forming in Europe and Asia. What do these developments portend for U.S. economic leadership? How should the United States respond to an erosion of its technological dominance?

Richard B. Freeman
Harvard University

Does globalization of the scientific/engineering workforce threaten U.S. economic leadership? Yes. It does so partly because of weakened comparative advantage in high technology, although deficits in this sector are smaller than in the rest of the economy.

Between the end of World War II and the 1990s, the United States had 40 to 50 percent of the world’s science and engineering PhDs, even though it only had 5 percent of the world’s population. We are sharing this with the rest of the world, but this does not mean that we should lose our excellence.

Because of the way we have structured our job market, science and engineering jobs are less attractive relative to MBAs and other things, which is not the case in China.

China and India have rapidly started to compete with the United States. The old north/south model of the global division of labor between high and low technology production is being undone by events, with IBM computers now being made by the Chinese.

In 1975, the United States had 40 percent of the world’s science and engineering PhDs; in 2000 this figure dropped to 15 percent, in part the result of a huge rise in enrollment in higher education around the world. Since the United States was the first country with mass higher education; the rest are now catching up. By 2010, China will be producing more science and engineering PhDs than the United States. Although their quality is lower, it will improve. However, since many Chinese students study in the United States, they may eventually stay.

We must not make the mistake, often cited, of comparing the figures for enrollment in two-year Chinese degrees with the figure for four-year American degrees. The four-year Chinese figure is still significant, however, and shows the story of the United States losing its advantage.

The rise in engineering salaries has been less than in other comparable fields such as law or medicine. Huge increases in life science public spending has not shown up in pay rates, and post-doctorals are increasingly moving into non-academic fields. Younger scientists do not receive NIH grants, which are usually awarded to senior scientists.

There has been no shortage of scientists because there is a large supply of foreign-born science and engineering students. Many stay to work in the United States after graduation. Fifty-two percent of science and engineering PhDs under the age of forty-five are foreign-born. During the 1990s, there was a rise from 11 to 17 percent in the number of those studying for a bachelor’s degree in science and engineering. It is also true that, Larry Summers’s comments notwithstanding, a steadily rising supply of female science and engineering graduates have worked to ensure that overall U.S. science and engineering labor supply has not declined.

Multinational corporations have shifted much of their research and development laboratories to populous low-income countries that have a good university-trained workforce. There clearly is a cost difference that entices firms to move operations to low-income countries.

The rise of the foreign challenge increases technological improvement. Now we have millions of former peasants in China working to produce useful things for us. However as the price of U.S. exportables falls, we could lose some good industries to third world countries.

The United States still has the best graduate education and research in the world. It has a good university-business link, openness and freedom, entrepreneurial laws, and sufficient wealth to fund risk-taking. However, the United States will face a period of adjustment

What could the United States do? It could increase its science and engineering workforce, position itself at the center of a collaboration network, increase stipends for U.S. citizens, or fast-track citizenship for highly talented foreign graduates.

A Chinese or Indian student wanting to study in the United States has to first swear before the consular office that they have no thoughts of taking a job in America. When I told some of the officers from the State Department that 92 percent of Chinese are still in the United States seven years after finishing their PhD, he said, “Well, we don’t pay attention to statistics, we just trust people.” So, it seems to me that it is a rather silly game that we are playing with these students. We really want them, and we ought to let them know from day one that they are welcome here and give them the fast-track citizenship as Australia does.

National Science Foundation (NSF) stipends grants per graduate have fallen as the number of graduates has risen, making it less attractive for people to enter science and engineering over the past thirty years. There is a strong correlation over time between the level of awards and the applications made by people for them. If you give people money to study in science and engineering rather than other subjects, you can encourage growth.

Steven J. Davis
AEI

The president’s American Competitiveness Initiative values U.S. intellectual property at $5 trillion, or about half of GDP. At an 8 percent capitalization rate, this implies that intellectual property contributes about 6 percent of national income per year. Since the value innovation rents must be shared between workers and capitalists, as it were, I shall assume that workers for high-tech companies get about half the rents. So, what is at stake is about 12 percent of national income.

But, most of the benefits of innovation flow to consumers. Everyone knows that the founders of Google are very wealthy, but the value they captured in profit is a tiny slither of the value they created for the world at large. Competition has also driven the benefit of software innovation to consumers, which is why we now all use free web browsers.

Look at the price of processing power in personal computers. In June 1993, Intel’s processors cost roughly $12 per MIPS (Millions of Instructions Per Second), and by 2001 this had declined to about 9 cents per MIPS. There have been similar declines for the prices of random access memory, hard disk storage, and other items where competition has rapidly driven the benefits of innovation to consumers. Speed and quality have risen everywhere, and price has plummeted over time.

There has been a decline in the global share of science and engineering graduates located in the United States, although this is more because other nations are rising than because the U.S. figure is falling.

We can divide technological development and use into categories of:

  1. Basic research without commercial application
  2. Commercialization, such as the development of faster computers
  3. Implementation and application, such as the use of computers in increasingly productive ways

The United States is good at all three--especially applying new technologies. If the United States loses its superiority in basic research and development (R&D), or even commercialization, it is not clear that it is seeing even relative decline in implementation. Losing a position of dominance is not the same as losing a standard of excellence.

It is reasonable to forecast that the worldwide capacity for basic research and development may double or triple. Remember that innovation rents are 12 percent of U.S. GDP and that half is eroded away by the loss of a dominant position. How much of an increase in the growth rate do we need to get from global R&D to offset this? So long as this is going to be greater than 0.3 percent per year, it will more than make up for this erosion of rents.

Are people in Europe, China, India, et cetera worse off today because the United States had the resources and institutions that--in the past sixty years--led the way in a remarkable development of new technological knowledge and its commercial application? If you think that this is true, then some internal consistency suggests that we can also be better off if other nations start developing more commercially relevant innovations, so long as we have the wherewithal to adopt, implement, and apply them.

Over the last ten to fifteen years, most of the U.S. productivity gains have come, not from basic R&D, but from mundane gains in implementation. In the U.S. retail sector, annual labor productivity growth doubled from 5.3 percent in 1987-95 to 10.1 percent in 1995-99, thanks to Wal-Mart’s expansion, the efforts of its competitors trying to keep up, and the efforts of category-killers like Staples and Home Depot.

These extraordinary productivity gains were not due to basic R&D, but to the receptivity and deregulated flexibility of the U.S. economy to the creative destruction process. Whatever effect competition has on specific wages, it is far outweighed by productivity gains provided to the economy as a whole.

David E. Weinstein
Columbia University

Pleas for government aid to help businesses against foreign competition and technological progress are not new. Although competition from modernized Japanese industry caused tough adjustments for U.S. rivals, Japanese management processes have been imitated and brought benefits to American firms.

Many PhDs end up at teaching colleges and do little research. R&D is driven by the upper tail of the distribution.

At the University of Michigan, the law, business and economics departments have the highest salary levels. However, within a research university, the pay for scientists is towards the upper end of the distribution, and so the gap between them and the highest-paid is not that vast.

The end of mandatory retirement for senior faculty means that academic careers now last forty to fifty years, rather than the post-PhD thirty years previously more common. Wages of academics may have fallen, but this may be the result of the elimination of mandatory retirement. An aging workforce may also bring declines in productivity.

The United States has enjoyed some monopoly power over markets for high technology goods. The key variable is the relative price of exports to imports, known as the terms of trade. Aside from the oil price rise since the 1970s, there has been very little change in the terms of trade.

Foreign research is not just a substitute for U.S research, but a complement that U.S. research can build on, and which can multiply its value and effectiveness. Since trade data suggests that foreigners produce slightly different things, trade provides us with an increased range of choice and innovations.

Similarly, firms may gain an advantage from other firms doing research. To the extent that other nations can do more research, we can do better research. This ensures that everyone can benefit. Trade is not only growing because we are importing more cars, but since we are importing new goods too. So, we may not be losing a monopoly, but gaining colleagues.

Globalization will have some costs and may erode some U.S. salaries, but it will increase the demand for some of our products, and allow us to buy better products from others.

AEI research assistant Chris Pope prepared this summary.

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AEI Participants

 

Steven J.
Davis
  • Steven J. Davis studies unemployment, job displacement, business dynamics, the effect of taxes on work activity, and other topics in economics. He is deputy dean for the faculty and professor of international business and economics at the University of Chicago Booth School of Business, a research associate at the National Bureau of Economic Research, and an economic adviser to the U.S. Congressional Budget Office.  He previously taught at Brown University and MIT.  As a visiting scholar at AEI, Mr. Davis studies how policy-related sources of uncertainty affect national economic performance.

  • Phone: 773-702-7312
    Email: sdavis@aei.org

 

Kevin A.
Hassett
  • Kevin A. Hassett is the State Farm James Q. Wilson Chair in American Politics and Culture at the American Enterprise Institute (AEI). He is also a resident scholar and AEI's director of economic policy studies.



    Before joining AEI, Hassett was a senior economist at the Board of Governors of the Federal Reserve System and an associate professor of economics and finance at Columbia (University) Business School. He served as a policy consultant to the US Department of the Treasury during the George H. W. Bush and Bill Clinton administrations.

    Hassett has also been an economic adviser to presidential candidates since 2000, when he became the chief economic adviser to Senator John McCain during that year's presidential primaries. He served as an economic adviser to the George W. Bush 2004 presidential campaign, a senior economic adviser to the McCain 2008 presidential campaign, and an economic adviser to the Mitt Romney 2012 presidential campaign.

    Hassett is the author or editor of many books, among them "Rethinking Competitiveness" (2012), "Toward Fundamental Tax Reform" (2005), "Bubbleology: The New Science of Stock Market Winners and Losers" (2002), and "Inequality and Tax Policy" (2001). He is also a columnist for National Review and has written for Bloomberg.

    Hassett frequently appears on Bloomberg radio and TV, CNBC, CNN, Fox News Channel, NPR, and "PBS NewsHour," among others. He is also often quoted by, and his opinion pieces have been published in, the Los Angeles Times, The New York Times, The Wall Street Journal, and The Washington Post.

    Hassett has a Ph.D. in economics from the University of Pennsylvania and a B.A. in economics from Swarthmore College.

  • Phone: 202-862-7157
    Email: khassett@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202-862-5862
    Email: emma.bennett@aei.org

 

David E.
Weinstein
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