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Here’s Proof the U.S. Is on the Verge of Huge Innovations

Inside The 2015 Consumer Electronics ShowInside The 2015 Consumer Electronics Show
An attendee views the Tesla Motors Inc. Model X vehicle with Panasonic Corp. battery during the 2015 Consumer Electronics Show (CES) in Las Vegas, Nevada on January 6, 2015. Photograph by Patrick T. Fallon — Bloomberg via Getty Images

So much of what the presidential candidates and the American people want to accomplish over the next four years and beyond depends on the U.S. economy growing faster, and more inclusively, than it has in recent years. This year’s hot economics book, The Rise and Fall of American Growth, by one of America’s most distinguished macroeconomists, Robert Gordon, casts a pall on whether this is possible, arguing that the U.S. had a golden century of increasing innovation from roughly 1870 to 1970, but this was unique. Since then, the rate of innovation, as measured by the annual growth in productivity (adjusted for additional labor and capital), has slowed markedly, and in Gordon’s view will continue at a slow pace for the foreseeable future, whether or not the ostensibly growth-boosting policy recommendations Gordon advances at the end of the book are implemented.

Gordon’s book was reviewed on by Fortune’s Chris Matthews, so I won’t repeat the main arguments here. Instead, I will provide a cautiously more optimistic view, but coupled with a plea for policy makers to ease the pain of more rapid productivity growth, if it materializes.

One reason for productivity optimism is outlined in a new e-book I have co-authored with former Clinton economic official Bo Cutter and Kauffman Foundation Vice President Dane Stangler, The Good Economy. In it, we share the view of some technology optimists (not all of them living in Silicon Valley) that the U.S. economy is currently experiencing another technological revolution, rivaling the industrial revolutions of the 19th century, and one that ultimately could boost annual long-term growth to as much as 3%, well above recent annual growth rates.

The core of our claim is that the convergence of enormous and continuous advances in computing power, the Internet of Things, broadband speeds, cloud computing, mobile applications, artificial intelligence, robotics and nanotechnology inevitably will unleash a broad range of new, disruptive products and services that none of us can foresee now. This will inevitably lead to faster growth in the future. The transition to more rapid growth will take time, to be sure, but this will not be unusual: electricity took several decades to fundamentally transform the economy and our society.

With a few exceptions, I wouldn’t look to large, established companies, however, to lead any innovation resurgence. That is because large companies specialize in incremental rather than disruptive innovation. The exceptions – Alphabet with its moonshot projects, Toyota and Honda with their hybrid cars, and long ago, AT&T with fiber optic cable and the transistor – are just that, exceptions.

Truly disruptive innovations that can enhance overall productivity in a big way are likely to come from startups (think of the telegraph, the telephone, the automobile, airplanes, computers, much software, Internet search, and air conditioning, all commercialized by startups). It may not be necessary to reverse the 30-year decline in the overall startup rate (the ratio of young companies with at least one employee to all firms) to usher in a more rapid wave of change, although having more startups, or “shots on goal,” would certainly help. The key is the formation and growth of new high-growth companies.

Some of these may come from solo entrepreneurs, such as Tesla CEO Elon Musk or Amazon CEO Jeff Bezos, or entrepreneurial teams, like Sergei Brin and Larry Page. Others may emerge from the growing numbers of “business accelerators,” in which like talent show competitions “American Idol” or “The Voice” the sponsors pick the most promising founders or founding teams, give them mentors, coaches and exposure to their peers, and provide them with some amount of startup funding. Evidence suggests that the really good accelerators — like Y Combinator in Silicon Valley or Tech Stars in multiple locations — enable startup participants to find more early stage financing and to grow.

Another promising development is the recent emergence of “tech studios” – Betaworks in New York, Pioneer Square Labs in Seattle, and FoundryDc in the nation’s capital. In this model, one or more successful entrepreneurs with deep knowledge in one or several industry “verticals” recruits scientists, technologists or other industry specialists, puts them together in a congenial, but typically intense atmosphere (not unlike some accelerators, but for longer, sustained periods) and pays them a salary, much as they would receive if they had gone to work for Bell Labs or any current in-house corporate R&D facility, and possibly some upside incentives (equity or options) in the companies that may be formed around their ideas.

Whether through solo entrepreneurs, entrepreneurial teams, companies boosted by accelerators, or firms generated by high tech studies, the convergence of multiple parallel technologies is likely to lead to more rapid innovation than the pessimists predict. That’s the good news. The potentially bad news is that faster innovation means more technology-induced labor market churn, and thus more displacement of the kind that has led to so much worker anxiety much in evidence during the Presidential campaign so far. If the nation adopts the kind of populist remedies being mentioned by some of the candidates – such as a return to trade protectionism in this country, or a halt to further trade liberalization which could lead to a slow backsliding toward more protection by all countries – then the pace innovation almost certainly would be lower than the optimistic trajectory outlined here, and correspondingly there may be less innovation-induced worker displacement.

But given the positive long-run impacts of more rapid innovation on standards of living, moving backward should not be welcomed. The far better approach is to strengthen the social safety net to better protect workers from the economic losses they suffer on account of both technological progress and open trade. One clear solution is a system of wage insurance, which has features attractive to both political parties, and was endorsed by President Obama in his State of the Union address this year.

There is too much gloom and doom being bandied about, by candidates and the innovation pessimists. The better response is to prepare to be surprised on innovation upside, and to address the very real concerns about those who may be displaced in the process.

Robert Litan has directed economic research at the Brookings Institution, the Kauffman Foundation and Bloomberg Government. His latest book is The Good Economy.