What’s wrong with the Rust Belt? And while we’re at it, what’s wrong with the Mississippi Delta and all the places in between? Reams of post-election analyses have turned up a range of explanations for the populist furor that has steamed America’s heartland and propelled President-elect Donald Trump’s candidacy: relentless trade pressure, job losses in manufacturing, a cultural gulf between coastal elites and everyone else, and a deep, generalized despondence, to name a few.
There is truth in all of it, no doubt, but it misses a bigger picture: America is undergoing a decades-long transition from the industrial economy of the 20th century to a new economy in the 21st that is shaped more than ever before by technological innovation and globalization. Some regions are rapidly adapting to the new order of things. But in the areas that are falling behind, people are justifiably anxious. It’s time for Washington to help those places claw their way into the winner’s circle by recognizing the forces at work and retooling its approach to economic development.
The Information Technology and Innovation Foundation closely monitors key markers of the innovation-driven new economy—indicators such as employment in high-tech and information technology fields, the export focus of manufacturing and services, inventor patent filings, and public and private investment in research and development. Every few years, we publish the data in a report called The State New Economy Index, which benchmarks the 50 states on the degree to which they are succeeding on these measures. The most recent edition came out in 2014, and it is striking to see that the states reaping the fewest rewards so far from the new economy are the same ones that were most likely to swing to Trump in 2016.
States that are deep blue in political terms, such as Massachusetts, California, and Washington State, tend to be powerhouses in The State New Economy Index because they are home to large numbers of highly educated workers, plentiful high-tech jobs, fast-growing companies, a buzz of entrepreneurial activity, and strong research universities. (Indeed, Massachusetts, California and Washington State ranked one, three, and four, respectively, in 2014.) Meanwhile, perennial red states such as Wyoming, Oklahoma, and Mississippi tend to lag far behind. (They came in 45th, 48th, and 50th in 2014—with Mississippi counting only about half as many high-tech jobs as Massachusetts, proportionally; Oklahoma counting nine times fewer fast-growing companies than California on a percentage basis; and Wyoming exporting barely one-third as many products and services as Washington State, after adjusting for industry mix.) And you’ll find most of the familiar political swing states clustered right in the middle of the pack: Pennsylvania was ranked number 22 in 2014; North Carolina was number 23; Florida was 25; New Mexico 26, Nevada 27, and Ohio 29.
At first blush, this might seem like great news for Republicans, because they appear to have a hardwired political advantage as the twin forces of technological innovation and globalization lift some boats to great new heights but leave others stuck in the mud, making conditions ripe for populist protest. This tension is symbolized by the rapid rise of gleaming new tech companies on the coasts and by a painful dynamic of deindustrialization in other parts of the country, such as the South and Midwest. Consider that America has lost an unprecedented one-third of its manufacturing jobs in the last 15 years—a majority to trade and declining competitiveness, not from increased productivity, as most pundits claim. These losses have been felt most acutely in states Trump won. And in the middle of all this—at the political fulcrum—the states that flipped from blue to red in 2016 are where overall job growth has been weakest since the Great Recession.
But good luck to any party trying to maintain a political advantage in such conditions. Trumpism may be thriving in the backdraft of the new economy today, but it could be demolished by the same forces tomorrow if those in power don’t help the economy lift more boats faster.
So, what to do? America needs a new kind of economic agenda that fits the realities of the new economy. There is no future in taking shelter or dodging change; the only way to create new jobs and increase people’s standards of living is to grow the economy by embracing further and faster transformation. This being the case, old economic orthodoxies of the neoclassical and Keynesian sort simply won’t cut it, and the same goes for old political dogmas—whether it’s the favorite conservative formula of cutting taxes and shrinking government, or the dominant liberal one of redistributing wealth through social policy. What America needs now is a new kind of growth economics that focuses on spurring innovation, boosting productivity, and improving global competitiveness, particularly in the regions that have been struggling the most to adapt to the tectonic shifts now underway.
In case there is any doubt that all Americans have an unreturnable stake in the new economy, ITIF has just released a new report that makes clear how technological innovation is in fact shaping every state and congressional district in the country. To be sure, some are quite a bit hotter than others—and the leaders tend to be clustered in the same blue states that lead in The State New Economy Index—but all are measurably invested. For example, the high-tech sector employs nearly 30,000 people per congressional district on average (with a median of close to 24,000), totaling just under 13 million people nationwide. There is not a district in the country that is not home to at least a few dozen tinkerers and innovators who have filed patent applications in recent years—and three-quarters of all districts have been home to 1,000 or more of these patent filers. Meanwhile, more than half of all congressional districts received at least $50 million in federal research funding in the last two fiscal years. And in just under half of all congressional districts, every single household has access to broadband Internet service with speeds in excess of 10 megabits per second. (Indeed, there are no congressional districts in which fewer than 80 percent of households have access to that level of broadband Internet service.)
There are plenty of quick moves the incoming Trump administration can make straight out of the gates to foster innovation, productivity, and competitiveness. That should start with enlisting an economic team that understands how the economy works in the real world today—not so much in the world of neoclassical economic theory, nor only at the macroeconomic level, but at the “mesoeconomic” level of industries and firms, where most of the action related to innovation, productivity, and competitiveness occurs.
It will take a similar paradigm shift to address the problem of uneven economic growth from region to region. Once upon a time, U.S. policymakers understood the importance of helping distressed regions—from LBJ, who launched the Appalachian Regional Commission, to Richard Nixon, who pursued a national “balanced growth” agenda, to Jimmy Carter, who led a formal White House Conference on Balanced National Growth and Economic Development. But that approach fell out of favor in the 1980s—and federal funding for key regional development programs was slashed—as ascendant neoclassical economic thinking held that people should move where the jobs are, not vice versa. (Easy to say for the rootless elites who are connected on LinkedIn; harder to do for average people with deep ties to their communities.) Economic and political divides have been deepening ever since between bustling, but increasingly sprawling, congested, and expensive urban areas such as New York City and the San Francisco Bay Area, and the comparatively hollowed-out heartland.
So it’s time for the federal government once again to undertake a concerted regional economic development initiative by first increasing funding for key federal programs such as the Economic Development Administration and Appalachian Regional Commission. Congress then should create a Rural Development Corporation to fund “new economy” projects in rural areas across the nation. These projects should include building out broadband infrastructure, supporting value-added agriculture projects that help farmers turn their crops into products that are worth more than just commodities, and research and development focused on rural industries such as timber, aquaculture, and energy production. All of this should be coupled with a national manufacturing agenda that includes expanded funding for the federal Manufacturing Extension Partnership and the new Manufacturing USA program, a targeted system of public-private partnerships that nurture innovation and accelerate commercialization of new technologies in distinct focus areas such as 3D printing, fiber-reinforced polymers, next-generation electronic devices. Congress also should institute a “reshoring” tax credit for firms that bring overseas jobs back to economically lagging counties, and it should encourage the administration to move at least some portion of federal jobs out of congested, high-cost cities to cities in the heartland.
More generally, one of the top priorities should be accelerating the pace of innovation and investment in every sector of the economy by enacting corporate tax reform that encourages big investments in productivity-enhancing machinery and software, and in research and development. Next, there should be hefty increases in federal support for R&D and infrastructure—including not just roads and bridges, but also the chips, sensors, and other information technologies that will make America’s infrastructure “smart.”
On a separate track, Congress and the administration need to ensure that the country’s workforce has the requisite education and skills to drive an innovation economy forward. That will require invigorating the “STEM” disciplines in U.S. schools and attracting more high-skilled students and workers from abroad. And for the U.S. economy to flourish, the administration will need to use the full weight of America’s power and influence to level the global playing field when it comes to trade by enforcing the rules of fair competition.
As a country, the United States is up to the challenge of adapting to and shaping the new economic order. But it will require recognizing the country’s strengths and building on them, being honest about its weaknesses and solving them, and looking to the future the way Americans always have—with optimism, determination, and a spirit of enterprise.