National Security and Economic Growth: A New Plan

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.