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Spengler

National Security and Economic Growth: A New Plan

November 2nd, 2013 - 4:08 pm

The distinguished venture capitalist Dr. Henry Kressel and I just published a proposal to restore American economic growth in The American Interest. You’ll have to subscribe to this excellent magazine to read the whole thing, but the introduction is posted on its website:

America faces a crisis of innovation, and our survival as the world’s industrial leader depends on its resolution. Overall research and development spending has stagnated as a proportion of national income since the 1950s, and our competitors are gaining on us. Even worse, the kind of fundamental R&D that produces game-changing innovations rather than incremental improvements has declined sharply relative to the size of the economy.

More is at stake than America’s future growth prospects. Scientific innovation and national security have comprised two sides of the same coin since World War II. Not for a generation have America’s security requirements begged for innovation as much as they do today. In place of a few large, well-defined threats that America faced in the relatively stable power balance of the Cold War, we now face a very large number of smaller and poorly defined threats in a chaotic world environment. The Bush and Obama Administrations had hoped to foster a new kind of stability, either by promoting democratic regimes in unstable theaters or by fostering multilateral cooperation and engaging prospective adversaries. Those hopes have faded. Reluctantly, America’s foreign policy community has come to accept the premise that we will confront a kaleidoscope of shifting threats in an indefinite span of instability.

Regrettably, the military that America built to beat the Soviet Union is in many ways poorly equipped to address the new threat regime, and unfortunately that legacy force has not changed as much as it might have over the past two decades. Even if policymakers chose to expand on the existing platform, the public’s perception of poor returns to commitments of blood and treasure during the past decade rules out this option as a viable political stance.

Tentatively and in piecemeal fashion, the American military is introducing a new generation of military technologies. Drones, battlefield robotics and similar technologies cast a wide net over the new threat horizon, but their practical application remains limited. Cyberwar has become a buzzword for defense planners, and in consequence the application of large-scale computation to the vast amount of information acquired by remote sensors (“Big Data”) has become a theme du jour for defense research and development, as the volume of prospective threat data swamps existing capacity to process information. But the new threat profile, in which a large number of adversaries with cheap weapons in the service of suicidal fanaticism create an ever-expanding set of low-level risks, presents significant problems for sensing and information processing. Extracting an ever-fainter signal from an ever-greater volume of noise challenges our existing understanding of the problem.

The roots of American growth are dry. Venture capital investing and emerging industries are a shadow of what they were a decade ago. Employment in the companies that make up the Russell 2000 index now stands at half its 2007 level. The S&P 500 has almost restored its employment level to pre-crisis levels, but medium-sized companies are not hiring. Virtually all the employment growth during the Great Expansion that Reagan set in motion came from emerging companies. That engine is stalled out and rusting. If we want to get growth back, we need both the high-tech driver as well as the incentives from entrepreneurs.

My co-author Dr. Kressel, a prominent physicist, was a key leader at RCA Labs for a generation where his teams invented the semiconductor laser, CMOS chip manufacturing, and several other technologies that helped define the digital age. For the past thirty years he has built a strong track record investing in emerging companies at Warburg Pincus, where he is the partner responsible for the technology practice.  He was there at the creation, so to speak, translating Defense Department mandates into tech breakthroughs that entrepreneurs later turned into trillions of dollars of market value and tens of millions of new jobs. There’s no-one better qualified to make this case.

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All Comments   (23)
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The commercialization of technology flows in cycles, in part due to excess liquidity from existing cash cows. Also, new industries flow 50 to 60 years AFTER the scientific clarification.

There is good, new science out there. The problem is getting capital to take the risks to bankroll it. Capital usually takes those risks when the rate of return from established industries falls and to make money, one needs to risk money.

A sign of a coming innovation cycle is when returns are dominated by financials, rather than honest profits from operations. Think Great Depression funding radio, TV, jets, nuclear. Think Junk Bond Era bankrolling PCs and the internet.

Today, capital has near zero or even negative retun. Money is desparately seeking return but will not invest until government and politics gets out of the way.

For that. Obama and the Democrats must be pushed from power.
1 year ago
1 year ago Link To Comment
David Goldman: you wrote: "But we explicitly reject industrial policy: governments should pick winners or fund businesses." Did you mean government should NOT pick winners or fund businesses?
1 year ago
1 year ago Link To Comment
Yes, the "not" was missing -- thanks.
1 year ago
1 year ago Link To Comment
"Employment in the companies that make up the Russell 2000 index now stands at half its 2007 level." Never heard that stat before. It reminds me of economists discovering after the Great Crash in the autumn of 1929 that 'freight car loadings' had fallen off in the spring of that year. Indicators smindicators - we didn't have any back then. Now we have so many that maybe we are failing to take notice of some quirky fact about employment in the Russell 2000 companies and wont see it coming any better the the former tycoons who jumped out the window back in 1929.
1 year ago
1 year ago Link To Comment
I like the optimistic attitude by the author, but as many posters below have pointed out we have huge obstacles to overcome for this rebirth to occur.

One obstacle not mentioned is that the top power brokers now have well tested and effective tools to keep tabs on everyone, all the time, and use this information to persuade judges, senators, candidates, editors, citizens groups and the like to get their thinking in line or destroy them.

If the U.S. electorate ever figured out what was really going on and could coalesce to deal with the crooks nothing will likely change.
1 year ago
1 year ago Link To Comment
Here's some interesting straws in the wind. Looks like some of the low information left are catching a clue.
Hans Blix has come out for thorium reactors
http://phys.org/news/2013-10-hans-blix-scientists-thorium-nuclear.html#ajTabs
Here some global warming scientists (including James Hanson) call for "safe nuclear" because wind and solar won't do the job.
http://phys.org/news/2013-11-experts-nuclear-power.html
1 year ago
1 year ago Link To Comment
Nothing will happen in this Country until this president and his corrupt leftist cronies are GONE, NOTHING. Even money that supported this president will not bring their overseas profits home, google, Apple to name two. Add to these incompetents obamacare and you scare the hell out of investment money to the point where Brazil and India look more attractive. Add to that again corruption in government circles today in America and it will be a long time before confidence is restored. As bad as things are today they will probably get much worse unless we see some more of the change that was promised, and it sure as hell won't be the Obama change.
1 year ago
1 year ago Link To Comment
Mr Goldman,
Don't omit the strong influence of our changing demographic and the emergence of the ill-educated underclass supplemented constantly by the illegals crossing up from the Rio Grande.
This ensures the increase and the continuity of the Democrat voter base.
No amount of entrepreneurial effort and capital investment effort and technical know-how can overcome the natural voting proclivities of such an expanding underclass.
They can be employed....but if they remain uneducable, and they will...they become a churning, stagnant workforce perpetually dependent upon the "benefits" proffered by the Democrats.
1 year ago
1 year ago Link To Comment
Are you serious sir? Are you serious at this point in the evolution of the Socialist Republic of America? We can do nothing as long as Barack Obama, Valerie Jarrett, and the rest of that herd of swine are in charge of our government. Wake up!!!
1 year ago
1 year ago Link To Comment
Holy Prophet APF
I don't know about well-defined, but there is certainly a very large threat openly and directly threatening us now: Islam. But the chances of any technological spinoff from resisting them is nil, except maybe in the area of espionage tech.
..........
Disagree here. The USA has finally launched a giant strategic technological war against Islam. But but this newly launched war has not come from the US Government. This strategic war has come from the American culture itself--and actually from both sides of the American culture. On the one hand the final end result of the fracking/horizontal drilling/big data imaging --will be oversupply of oil. On the other hand increased uptake of natural gas as a transportation fuel will steadily chop into demand for oil. All within the next ten years. However, further out--15 years and beyond-- are the category killers for hydrocarbons. lftrThorium reactors described in the comments below--which will cut the cost of electricity to 1/4-1/10 current cheapest coal. These cost savings will enter the transportation hub by means of Tesla--but probably more importantly--the
Tesla imitations produced by the Major automotive companies. (imho Tesla big breakthrough was to develop cars that could run over 200 miles before recharging. Which makes them suitable for local driving.)As mentioned, it will be more than 15 years before electric cars hit the market in volume. Shell oil put out their projections for the future. They too see oil as a transportation fuel declining but only after 2035. However, they think that hydrogen as well as electricity will play a role in displacing oil as a transportation fuel in the long term--while short term natural gas will do that job. http://oilprice.com/Energy/Energy-General/Shells-Predictions-for-the-Future.html

The end result will be the collapse of the oil prices, a fundamental redirection of world wide capital flows as profound as that of the 1970's when US oil production peaked and OPEC hit the world with the first OPEC oil strikes. (This has already begun--and imho has backstopped the Fed's profligate QE's.) The gulf oil sheiks won't have the spare capital to fund 30,000 radical madrasses in Pakistan and elsewhere around the globe. Rather what they'll do is fund their excesses until they have no more money and then they'll borrow till they go into debt. Then they'll sell their assets to pay their debts.

(All Russophiles take note: Putin's Russia will run into the same problems as the Muslims when the price of oil collapses. Remember tell all Russian bosses that Russia must diversify...stop throwing entrepreneurs in jail. Allow patent protection.)

Generally all strategic warfare is economic in nature. Time and money are inter related. The cold war as envisioned by George Kennan in 1948 was a play for time. His strategic observation was that communism as an economic system was bogus. It would collapse of its own weight and internal contradictions if it were not allowed to expand. All of Americas wars from the Korean war to the Viet Nam wars to the central american wars--were just holding actions--a play for time. Designed merely to give internal contradictions of the Soviet Union time to cause the Soviet Union to self destruct. Which happened in 1990.

In the case of the Radical Islam, its simple enough to say that since the initial OPEC strikes of 1973, radical islam on the part of both the sunni salafists and the shia khomeinists--has been funded by oil.

Knock down the price of oil and all these people will be much more peaceable.

1 year ago
1 year ago Link To Comment
This scheme is indistinguishable from the type of top down thinking that has us in it's grip. Same game, better players. The Reagan model bequeathed, and properly so, two Bushes, a Clinton, and Obama. Let us look for our model before the Leviathan of 1933, and better still 1913.
1 year ago
1 year ago Link To Comment
Ah, you so get it. There's simply no reason for a federal government that's more that 10% of the GDP in size. 5% for defense and the rest for corruption and graft. That'd do it. Let the STATES do their job.
1 year ago
1 year ago Link To Comment
Yeah, I'm just dying to go back to subsistance agriculture!
1 year ago
1 year ago Link To Comment
Yes sir!
1 year ago
1 year ago Link To Comment
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