Tags: US | R&D | innovative | competitive

Inadequate Investment Derailed US Economy

By    |   Friday, 26 Jul 2013 08:02 AM

Inadequate investment has seriously eroded the innovative capacity and competitive position of the U.S. economy. The principle reason for falling investment relative to gross domestic product (GDP) was the 1986 tax reform act.

This legislation lowered personal tax rates below corporate tax rates at virtually all levels of net income, which provided disincentives to invest in long-term businesses that employed large masses of individuals.

As a share of GDP, domestic research and development (R&D) grew only 3 percent from 1987 through 2008, while that for China and Korea rose 110 percent and 91 percent, respectively. During this time, U.S. R&D rose a mere 0.3 percent per annum, compared with 4.9 percent from 1953 through 1987. Foreign R&D by U.S. firms grew 2.6 times more than its domestic equivalent between 1997 and 2007, all according to Information Technology & Innovation Foundation (ITIF), a non-partisan research and educational institute.

Over the past decade, the United States ranked last of 40 countries in improving its innovative capacity and competitive position. By 2008, the United States was 6th, behind China, Korea, Singapore and Sweden.

In addition, the United States has the highest effective corporate tax rate in the 34-nation Organization of Cooperative Economic Development (OECD), after accounting for income deductions. This situation has also contributed to the low levels of investment in the United States. Since 2002, the United States has run a trade deficit in advanced technology products, and China is now the number one exporter in this area, all based on data from ITIF.

As investment plummeted, so did the economic multiplier and monetary velocity. The reason is simple — capital spent at the beginning of the production cycle (investment) generates much more income than does income spent toward the end (consumption).

Since 1980, monetary velocity fell nearly 60 percent, according to the St. Louis Federal Reserve Bank. The result was stagnant inflation-adjusted income for the masses, a dysfunctional labor market and widening wealth inequality, where the share held by the top 1 percent grew from roughly 20 percent to 35 percent during this period, based on a study by economist Edward Nathan Wolff.

The reasons for this decline are the values of our society. During the past 30 years, too much focus was placed on financial engineering, which transferred much wealth at the expense of its creation. Financial firms valued profits from short-term trading arbitrage rather than long-term investments in products and services. Employment and incomes stagnated and our labor pool is now ill-prepared to meet near term global demand.

It may take many years before the United States becomes truly competitive again.

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Inadequate investment has seriously eroded the innovative capacity and competitive position of the U.S. economy. The principle reason for falling investment relative to gross domestic product (GDP) was the 1986 tax reform act.
US,R&D,innovative,competitive
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2013-02-26
Friday, 26 Jul 2013 08:02 AM
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