For Once and for All, Let's Agree the Government Can and Should Pick Winners

Notwithstanding the Tea Party fear mongering, there is a lot of trepidation these days about America drifting toward socialism and the growth of government. (Put aside the fact that it is not true. Aside from health care, the huge government interventions over the last 18 months were isolated emergency actions that most economists credit with keeping us out of an epic Depression. What's more, most Americans actually got a tax cut this year.)

It's not just conservatives who worry about government being too active, many moderates and liberals who abide by the so-called Washington Consensus hold as an article of faith that while it's okay for the government to do things like fund basic research and improve education, by all means it should not "pick winners." On this matter (as on many), the Washington Consensus is wrong.

Let's be clear about what "picking winners" means. It means government identifying industries and technologies where the country needs to be competitive globally, (i.e. health IT, nanotechnology, green energy, biotech, robotics, broadband) and then developing and implementing policies to work with the private sector to ensure that we grow and retain high-end jobs at home in these key sectors. Picking winners is not simply another name for an "industrial policy" in which the government selects specific firms or extremely narrow technologies, nationalizes industries, or impedes beneficial market forces.

There's a clear reason why we need to put the rhetoric about socialism aside and start picking winners: we are starting to slip in terms of innovation and competitiveness. In a 2009 report examining innovation-based competitiveness among 40 nations, ITIF found that the United States has slipped from first to sixth place in the last decade, behind Singapore, Sweden, South Korea and others. In fact, the U.S. ranked dead last in progress in innovation and competitiveness over the last decade. Other countries are making more progress in developing the capacity to innovate and lead in key sectors. Unless we are willing to live with high unemployment, chronic trade deficits and relatively lower standards are living, we need to act.

Creating the right market conditions for our companies and workers, (i.e. sound tax, trade, and fiscal policies) and investing in basic research are necessary but not sufficient conditions to keep pace with the nations around the world competing vigorously for innovation and related jobs. But we are kidding ourselves if we think that will be enough. Instead of the hodgepodge of policies from an array of complex tax laws to wasteful farm subsidies to a dizzying jumble of state incentives, we need a coordinated and comprehensive approach to making sure we not only come up with the next "big thing" but also that we do not have it snatched away from us. (Remember the VCR?) And that means picking key technologies and industries to focus on.

But the free market opponents will say how can Washington outsmart the market? Is this the same market that through its infinite wisdom invested hundreds of billions of subprime mortgages? In fact, the government has a pretty good track record of picking winners. Just look at the technologies that the government had a key role in developing: the Internet, the web browser, the search engine, computer graphics, semiconductors, and a host of others. There are many other examples of success stories made possible not because government anointed a particular young entrepreneur but because the government made a conscious choice to open new pathways into which young innovators could embark.

In the 1980s, we responded to Japan's economic ascendance by picking winners with the research and development tax credit, creating programs like the Advanced Technology Program and the Manufacturing Extension Partnership, and aggressively taking on unfair trade policies. We need to do the same today.

It's time to break free of neo-classical economic orthodoxy that preaches that markets acting on their own optimize economic well-being and that low taxes, minimal regulation, and free trade alone can guarantee long-term U.S. leadership on the growth engines of the future. These ingredients work best when the government develops a strategy for correcting systemic "market failures" that limit innovation. We need to come to recognize that our country and not just our companies are competing and begin to think and act more like a country.