They Want To Eat Our Lunch

“We are competing with everyone, everywhere, every day, forever.”

That was among the sobering messages that emerged from a program recently put on by the Washington Business Alliance. The event assembled experts from government, science, education, and industry to discuss how best to connect Washington State to the national innovation ecosystem.

It was U.S. Representative Derek Kilmer who provided the line about “competing with everyone, everywhere, every day, forever” — words that once stared down at him from a poster on a wall of the Economic Development Board of Tacoma-Pierce County. Derek’s subsequent experience in the U.S. Congress has only confirmed the message.  “Other nations want to eat our lunch,” Kilmer said. They “are not sitting still, and they’re certainly not farting around with government shutdowns and sequestration and some of the frivolity that you see in our nation’s capital right now.”

Dr. Rob Atkinson, president of the D.C.-based Information Technology and Innovation Foundation gave his analysis on what it will take for Washington State to succeed in the global innovation race. “As good as Washington State is doing,” Atkinson cautioned, “you really fundamentally cannot do this on your own. It doesn’t matter what [the state does] if you don’t have help from the federal government. If the federal government’s immigration, tax, regulatory, and investment policies are not up to par, it’s going to be very, very hard for Washington State to succeed.”

The ITIF compiles a highly-regarded biannual 50-state scorecard – the State New Economy Index – which evaluates state economies for knowledge jobs, globalization, economic dynamism, digital economy, and innovation capacity. Washington ranked 4th in 2014. Atkinson identified several areas where Washington is “the real leader… You rank first in patents… First place in scientists and engineers… Fourth in venture capital… Washington is second on IT jobs. Fifth on managerial, professional, and technical jobs. Why does that matter? These are the jobs that are least likely to be offshored. These are the jobs that have the highest wages of any occupation.”

The state also turned in mediocre performance on a couple critical metrics: “You are 30th in overall entrepreneurial activity and 26th in IPOs,” Atkinson said. He concluded, “if I were to, just from the outside, look at the data and say what would I focus on as a Washington state challenge, it would be that entrepreneurial ecosystem.”

Egils Milbergs, Former Executive Director of the defunct Washington Economic Development Commission, spoke about the need for state’s to shift the orientation of their economic development strategies. “I don’t think states have got economic development right,” Milbergs stated. “Most states are playing the game of trying to steal assets from each other and aren’t really building, what I call, innovation capacity. It isn’t a zero-sum game. We need a different kind of approach… We need a new model that’s not based on low cost competition, but rather on value creation. And value creation comes from innovation.”

United States “No Longer the Leader” for Innovation

Dr. Atkinson argued that the US has lost its lead in the global innovation race. “We’re no longer the leader,” he said. “We’re still in the top ten, but we’re falling down.” He identified “three main reasons why… in the 1960s the U.S. [was] such a powerhouse for innovation.” First, “an incredibly large market and so we could scale innovation.” Second, “the most entrepreneurial culture of the world.” And third, “We had federal support for research. In the 1960s the federal government funded more R&D than the entire world combined public and private.”

The US’s slipping position in the global innovation system is the result of our treading water still while other countries charge ahead. Dr. Atkinson noted that the US was the first country in the world to implement an R&D tax credit. “We had the most generous [credit] in the world as late as the early 1990s.” Yet, “today we have the 27th most generous R&D tax credit.” Not because the US credit has gotten more stingy, “but because other countries are just expanding.” Atkinson said there are now countries with R&D credits six times more generous than the US.

Dr. Atkinson also identified the US corporate tax rate as a place where foreign innovators are leaving the US in the dust. “We have the highest effective corporate tax rate in the world. And yet a decade ago the average OECD tax rate was essentially on par with the US rate. Today the average OECD tax rate… is ten percentage points below the US rate. That’s because all these countries have made big, big bets on lowering their corporate rate, expanding investment, and the like.

Rep. Kilmer spoke to the steep competition the U.S. faces in the global innovation economy. “Saudi Arabia, a few years back, opened up a research university that on the day it opened it got an endowment the size of MIT’s endowment which took 147 years to build,” Kilmer told the audience. “In the last decade China has doubled its number of students in institutions of higher education and has multiplied five-fold the number of institutions of higher education.

Both Dr. Atkinson and Rep. Kilmer argued that innovation arises from purposeful investments in the ecosystem that enables it. Kilmer pointed to “a number of examples, from the Google car that can drive itself, to the Internet, to radiology; all advancements which were founded by the same venture capitalist — Uncle Sam. You look at the phone in your pocket, and everything from the Internet to the GPS system on it to the lithium batteries in it, all came from government sponsored research. Kilmer quoted Paul Otellin (former Intel CEO): ‘Without a change in federal research policy, the next big thing will not be invented here. Jobs will not be created here. And wealth will not accrue here.”

Growing High Quality Manufacturing Jobs

Throughout the program, attention kept returning to the importance of manufacturing. Rep. Kilmer cited the International Economic Development Council who reported in 2013 that “the number one factor that businesses use when making their location decisions is the availability of good steel workers; number one with a bullet. And yet one-third of U.S. manufacturers say that they have a steel shortage and they have positions that have remained open for an extended period of time.”

Kilmer did not have to look far to confirm this. Manufacturing executive Randy Gardiner (CEO of Red Dot) was on hand to speak to his firm’s own struggle to recruit qualified production workers. He argued that manufacturing’s reputation had not caught up with the new reality. “I would challenge anybody in here to tell me that a Boeing job is not a living wage job,” Gardiner said. “It is… But I can’t recall the time when I’ve had a group of parents come up and tell me, ‘I can hardly wait for my son or daughter to get into manufacturing.’” Importantly, Gardiner reminded, “most manufacturing jobs do not require a four-year degree.”

Gardiner noted that the composition of US manufacturing jobs is shifting. “We complain about all the manufacturing jobs that supposedly are sent overseas,” Gardiner said. “But I can tell you most of those jobs we wouldn’t want. The ones that are here today in advanced manufacturing do require higher skill level, but we’ve disparaged the manufacturing job to a level to where it’s not an attractive career choice.”

The loss of US manufacturing jobs has been severe. Atkinson claimed that “in the 2000s, [the US] lost a third of our manufacturing jobs. That was actually a rate of job loss that was higher and faster than the job loss in manufacturing in the great depression.”

As a community, Gardiner says Washington’s manufacturers need to focus on “changing the image of advanced manufacturing” — spreading awareness that young people can put high school degrees and the two-year degrees to work in a living wage job where they’ll learn and apply cutting edge technology.

Export Import Bank

Rep. Kilmer provided a vigorous “mythbusting” in regards to the Export-Import Bank. Reauthorizing the Bank “really matters,” Kilmer claimed. “To our country, and certainly to Washington State. We’re the most trade dependent state in the nation. And unfortunately it has become a political  hot potato in Congress.”

The Export-Import Bank basically provides export financing so that the US can sell products around the world. It provides everything from export finance to export insurance. Rep. Kilmer was insistent that “It’s not just the Bank of Boeing. There are small businesses” that use the Bank too. “I was down in Grays Harbor County meeting with a small manufacturer that literally depends on the Export-Import Bank to serve some of their customers.”

Rep. Kilmer also took on “the false belief that [the Export-Import Bank] is somehow costing taxpayers money. Here’s the truth. Last year the Export-Import Bank actually contributed dollars back into the Treasury. It doesn’t cost taxpayers money.” Kilmer stressed that the Ex-Im Bank is not unique to the United States. “The fact is,” he said, “more than 60 nations around the globe, most of whom are our direct competitors, have something similar to the Export-Import Bank.”

“This should be a no-brainer from a public policy standpoint… What has happened is… Congress has kicked the can down the road to June… It puts the Export-Import Bank in great peril because there is no forcing mechanism to force Congress to take action to extend it beyond that.” Moreover, it fails to acknowledge the long-term nature of international business deals. “These are not deals that happen overnight. And having some certainty of financing is very, very important.”

Kilmer said that his “main takeaway,” from his days on the Economic Development Board of Tacoma-Pierce County, “was what employers want from government more than anything else is an environment of trust and predictability. And I think between the sequestration and the shutdown, the failure to make long-term investment in infrastructure, the failure to deal with these natural research issues, and the failure to  reauthorize the Export-Import Bank, Congress has a done a pretty fine job of screwing that up.”