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26
1
3
EXECUTIVE OFFICE OF THE PRESIDENT
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON, D.C. 20500
THE CHAIRMAN
May 27, 1992
MEMORANDUM TO MICHAEL J. BOSKIN
FROM:
J.D. FOSTER frst
SUBJECT:
Conversation with Congressman Bob Walker
I received a heads-up call from Bob Walker's staffer on the House Science,
Space, and Technology Committee to the effect that Walker is going to call to ask
you to testify either Wednesday or Thursday (3rd or 4th) of next week on
international competitiveness.
The democrats and republicans have introduced competing bills on
international competitiveness. The democrats' bill (George Brown and Gephardt, et
al) includes an expanded grant program, primarily for "science", to be run out of the
Commerce Department as well as various tax proposals. The republican bill is a
repackaging of various administration sponsored or supported tax provisions. (More
details on these programs are coming.)
Walker believes this is intended as a major campaign move, possibly in
support of the Clinton industrial policy program. Walker also believes the
democratic bill is intended to be marked up and sent to the House floor. This
seems unlikely as the bill includes tax provisions and Rosty is unlikely to let a
loose tax vehicle make its way to the Senate. The bill could, however, be attached
to the trade bill which is expected to go to the Senate at some point and which
already qualifies as a tax vehicle.
Bromley and someone from Commerce is expected to be asked to testify.
Both are expected to hew the Administration line in testimony and to wander afield
during Q&A.
This could be a reasonable opportunity for you (and Darman?, as members of
the Council on Competitiveness) to talk up the President's tax proposals while
criticizing industrial policy in all its forms, as well as other necessary measures to
improve competitiveness like the Balanced Budget Amendment and regulatory
reform.
Finally, if the idea is appealing but the timing is difficult, Walker could be
encouraged to suggest a third hearing at a later date.
July 30, 1992
TO:
MICHAEL BOSKIN
FROM:
K.C. FUNG
STEVE KAMIN
SUBJECT: TALKING POINTS ON U.S. COMPETITIVENESS
INTRODUCTION
The long-term competitiveness of the United States is
best reflected by our standard of living. In order to
achieve the highest standard of living, we have to
achieve the highest possible rate of economic growth.
The government cannot efficiently mandate or direct
economic growth. But it can and should create
conditions that encourage market-driven growth.
Among other things, that requires improving incentives
and reducing barriers to saving, investing, working and
innovating.
In particular, promoting growth may require reducing
the burden of government regulation. This will enhance
the economy's ability to respond flexibly to changes in
supplies of resources, demands for products, and new
technologies.
U.S. COMPETITIVENESS IS NOT IN DECLINE
The facts do not support the assertion that the United
States is in decline. With less than 5 percent of the
world's population, America produces more than a
quarter of the world's total GNP.
Our citizens have the highest standard of living in the
world.
-
U.S. GDP per capita of $22,056 in 1990, the
latest year for which comparable data are
available, places the United States more than
25 percent above Germany and Japan, based on
BLS data that adjust for purchasing power
differences.
The U.S. has the highest absolute level of productivity
of any country in the world, with a GNP per employed
person of $45,918 in 1990.
-
According to BLS data, the U.S. is more than
20 percent above the average of the other G-7
countries.
As of 1991, the U.S. produced a larger share of the
industrial output of the OECD than it did in 1970.
The shift of some workers into the service sector in
the 1980s in part was enabled by a large increase in
manufacturing productivity.
The bottom line is that the U.S. is not de-
industrializing. Taken together, the facts compel the
conclusion that, at least for now, the U.S. is not in
decline.
STEPS TO ENHANCE U.S. COMPETITIVENESS
The U.S. cannot take sustained, solid, long-term
economic growth for granted. We have serious
challenges to overcome to increase our productivity
growth.
To improve the U.S. standard of living and set the
basis for long-term growth, we have to increase
workers' skills and provide them with more and better
capital and technology. We also have to reduce
impediments to the smooth functioning of markets.
Sound policies can have an effect on productivity,
enough to have an important impact over a span of
years.
-
Small growth rate differences have a substantial effect
on how rapidly living standards increase from one
generation to another.
Investment and Saving in the U.S. Economy
O
Sustained U.S. economic growth requires a continuing
stream of investment in new capital, which in turn
requires a high rate of savings.
-
Productivity growth and investment rates are highly
correlated. During 1959-73, capital per worker in the
private business sector grew 2.4 percent annually while
productivity grew by 2.8 percent. During 1973-89,
these figures dropped to 0.8 percent and 0.9 percent,
respectively.
-
The rate of savings in the U.S. economy moved from
percent over the 19 - period to percent during
19 - .
One of the keys to ensure the availability of new
capital is sound monetary and fiscal policy. Low and
steady inflation will reduce uncertainty and promote
investment. A successful fiscal policy over the long
term would, by balancing the budget, release resources
for private investment and lower the cost of capital.
-
The President has submitted budgets with a focus on
both controlling the growth of government spending and,
within proposed spending categories, shifting from
current consumption to investment.
Tax policy should aim to minimize distortions to incentives
to save and invest.
-
The Administration has proposed the introduction of
Family Savings Accounts as a way to stimulate personal
saving for pre-retirement objectives.
-
The Administration has proposed (1) a capital gains
incentive that reduces the tax on long-term gains to
15.4 percent; (2) a new 15 percent Investment Tax
Allowance; and (3) simplified and liberalized treatment
of depreciation.
-
The Administration also has proposed the establishment
of Enterprise Zones to bring entrepreneurship and
opportunity to distressed areas.
Over the long term, a well functioning financial system
is essential to ensure that business and consumers that
rely on credit have access to the funds they need.
Demographic changes in the U.S. can have an impact on
productivity. As the baby boom generation ages, the
labor force will begin to grow more slowly.
Historically, a slowing in labor force growth is
associated with an increase in labor productivity.
Better and New Technology
Economic growth is enhanced by policies supporting the
development of our intellectual capital.
In areas where the gains from innovation can be captured by
private entrepreneurs, so that there are sufficient
incentives for private R&D, innovation is best pursued by
the private sector. This ensures that R&D effort will be
directed toward the most productive, market-worthy projects.
-
To promote private innovation, the Administration has
consistently advocated making the R&D tax credit a
permanent part of the tax code.
-
Reducing the tax rate on capital gains would also
improve the incentives for private R&D.
At the pre-competitive stage of R&D, when gains to
innovation are hard to capture and private R&D
therefore would be unlikely to occur, there is an
important role for government-funded research
activities.
-
This year we proposed a record $76.6 billion R&D budget
both for basic research and for applied research and
development. (check)
The Administration has consistently highlighted the
importance of basic and applied research activities and
the importance of reducing barriers to innovation.
Other Administration initiatives include:
-
Continuing implementation of the National Cooperative
Research Act (NRCA) of 1984, which enables private
companies to form research alliances without fear of
antitrust violations.
-
Proposed legislation to expand the NRCA to include
joint production ventures.
-
Redeployment of the National Weapons Laboratories'
assets in favor of broader (non-defense) objectives.
O
However, the Administration is opposed to any sort of
industrial policy in which the government, not the
market, would pick winners and losers.
-
The government possesses no special expertise in this
area relative to the private sector.
-
We remain competitive, world leaders in many technology
based industries -- pharmaceuticals, aerospace, and
computers -- notwithstanding our lack of an industrial
policy.
-
"Success cases" of foreign government support for
particular high-technology industries are not as
successful as they might appear to be.
-
For example, Airbus has become prominent at the
cost of billions of dollars in government
subsidies. These have benefited a small group of
producers while reducing the welfare of a much
larger group of taxpayers.
-
For every "successful" government-supported high-
technology industry, there may be various outright
failures that never become publicized.
Improved Labor Quality
Improved labor quality is considered, along with capital
investment and technological innovation, to be the third
major factor underlying increases in productivity.
Higher and improved levels of schooling should lead to
higher worker productivity. The Administration has made
improvements in the nation's educational system a high
priority.
-
The Administration has proposed a record $34.9 billion
in funds for the Education Department and Head Start.
-
In April 1991 the President announced his AMERICA 2000
education reform strategy, aimed at helping communities
achieve the National Education Goals by the year 2000.
-
The Administration has advanced various proposals to
improve the quality of schooling by increasing choices
of schooling available to middle and low income
families.
Through the Job Training 2000 initiative, the Administration
proposed to overhaul the current fragmented, inefficient
Federal job training program.
Increasing the Role of Market Forces
The government can substantially enhance the role of market
forces through reduction of government regulation of the
economy. This will allow competition to determine the
amount of goods and services produced and the prices at
which these are transacted. It also promotes production on
a least-cost basis, and the channelling of investment into
the most productive projects.
As part of an on-going effort to widen the role of market
forces, the President's Council on Competitiveness reviews
government regulations to ensure they are cost effective and
minimize burdens on the economy.
In his State of the Union Address in January 1992, the
President announced a 90-day moratorium on new regulations
(which was later extended an additional 180 days). All
government agencies were instructed to evaluate existing
regulations with regard to their effectiveness and their
burden on private sector costs, and to take actions to
reduce these burdens.
-
The estimated annual cost savings from actions
announced during the 90-day period ultimately should
generate savings of $15 to $20 billion.
COMMENTS ON SELECTED PROVISIONS OF H.R. 5229 AND H.R. 5230
H.R. 5229 is the Fundamental Competitiveness Act of 1992.
H.R. 5230 is the American Technology and Competitiveness
Act.
-
H.R. 5229 focuses on providing tax incentives for small
businesses and for R&D activities.
-
H.R. 5230 is a more ambitious bill that would
substantially escalate Federal involvement in
commercial R&D and investment.
Tax Policy:
Both bills include (1) making the R&D tax credit permanent,
and (2) indexing capital gains for inflation. These are
good.
Various proposals in H.R. 5229 -- deductibility of
dividends, a 10 percent tax credit for new machinery
purchases, allowing deductibility of capital losses from
corporate income, and creation of an individual tax
exemption for interest and dividend income -- may be
desireable in principle. However, they are revenue-losers
and would have to be considered in conjunction with
offsetting revenue measures.
H.R. 5230 proposes raising revenues through increased taxes
on high-income recipients. This reduces the incentive to
work and contradicts stated Administration policy.
Legal Policy:
H.R. 5229 would allow firms participating in joint R&D under
the NCRA to jointly produce as well. We support this.
-
However, it also would base merger analysis on world
market shares, which would be highly inappropriate in
many circumstances.
H.R. 5229 addresses civil justice reform through limits on
professional liability unless negligence in proved and
criteria for when punitive damages could be awarded. We
support these measures.
-
It also would put a cap on attorneys' fees, which is
more problematic.
H.R. 5229 would set uniform standards for product seller
liability and punitive damages, which also is consistent
with Administration policy.
Technology Policy:
H.R. 5230 seeks the expansion of the present Advanced
Technology Program to additional "critical technologies",
and the formation of new Federally-funded industry consortia
pursuing applied as well as pre-competitive R&D. This is
inconsistent with our view of the role of government in R&D.
H.R. 5230 sets up a Council on Technology and
Competitiveness to develop a plan for U.S. leadership in
critical technology. The CEA already has voiced opposition
to this proposal: it involves picking winners and losers, it
replicates the function of existing groups, and would add
another layer of bureaucracy.
H.R. 5230 provides for R&D loans to small and medium-sized
businesses at below-market rates, as well as government
purchases of equity capital in small R&D firms. These are
both inappropriate means of supporting private R&D.
107-30-92
PM
FROM
D
MINORITY
IVL
Defense Comparisons
(Billions of Current Dollars)
1993
1994
1995
1996
1993-96
050 Budget Plan in 1992
BA
288.4
289.4
292.8
295.2
1165.8
OT
294.1
288.7
289.0
292.1
1163.9
President 1993 Plan (CBO Re-estimate)
BA
281.0
281.6
284.3
285.7
1132.6
OT
292.2
283.4
282.9
286.1
1144.6
Clinton (estimate)
BA
264.1
267.3
268.5
261.8
1061.7
OT
281.2
270.9
268.4
265.6
1086.1
Aspin Option C (see below)
BA
n.a.
n.a.
n.a.
n.a.
1094.2
OT
n.a.
n.a.
n.a.
n.a.
n.a.
Clinton Cuts Relative to the President
Clinton -- - - Outlays (provided in campaign material)
Defense cuts
-2.0
-8.5
-10.5
-16.5
-37.5
Intell cuts
-1.0
-1.5
-1.5
-1.5
-5.5
Proc Reform
-5.7
0.0
0.0
0.0
--5.7
Inven Reform
-2.3
-2.5
-2.5
-2.5
-9.8
TOTAL OT
-11.0
-12.5
-14.5
-20.5
-58.5
OT Prior est. *
0.0
-3.2
-4.2
-5.0
OT New est. *
-11.0
-9.3
-10.3
-15.5
TOTAL BA est. *
-16.9
-14.3
-15.8
-23.9
-70.9
* Estimates based upon 050 Year 1-4 spendout rates of 65%, 19%, 9% and 4%.
Aspin's Alternatives (BA Cuts) Relative to President
four-fifths
Aspin
of Aspin
1993-97
Option D, would cut less than the President's Plan
22.4
28.0
Option C, Aspin's preferred option
-38.4
-48.0
Option B
-58.4
-73.0
Option A
-132.0
-165.0
Clinton's Plan would mean BA cuts of about $71 billion more than what the
President has proposed over the 1993-1996 period. Cuts of this magnitude are
twice Aspin's preferred option (between Aspin options A and B).
SBC Minority Staff
07/29/92
IM
ГЛОМ
DDU
Defense Related Employment
Bush
Bush
Clinton
Bush
Clinton
Clinton-
1992
1996
1996
Delta
Direct Employment
Delta
Bush
Active [1]
1937
1640
1300
-311
Reserve [2]
-637
-326
111
92
70
-19
DoD Civ [3]
-41
-22
940
908
611
-36
industry [4]
-329
-293
3050
2267
2067
-856
-983
-127
Subtotal Direct
6038
4907
4048
-1222
-1990
-768
Industry Indirect Employment [5]
CBO Assumption (0.5 Multiplier)
-428
New Mexico Unlv. Assumption (2.0 Multiplier)
--492
-64
-1712
-1966
-254
Total Employment Effects
With CBO Indirect Employment Assumption
-1650
-2482
-832
/
With New Mexico Indirect Employment Assumption
-2934
-3956
-1022
Notes:
and B.
[1] Active figures for Bush from DoD Comptroller; Clinton based on Aspin Options A
[2] Reserve figures count 10 percent of Selected Reserve as employed (consistent with
Aspin Options A and B.
annual reserve training). Figures for Bush from DoD Comptroller; Clinton based on
[3] DoD civilian figures for Bush from DoD Comptroller; Clinton based on cuts
proportional to active/reserve cuts.
Project (DBP); Clinton based on DBP.
[4] Industry figures for 1992 from DoD Comptroller; Bush 1996 from Defense Budget
[5] Industry multipliers based on CBO (2/92) and New Mexico Univ. (7/92) studies.
SBC Minority Staff
07/16/92
101
02.44 [ IVI FROM D w MINORITI
UNITED STATES SENATE
Committee on the Budget
TELECOPIER DATA SHEET
TO: Person receiving: DANIO Beaconso
Organization:
CEA
Receiving person's telephone number:
Fax 395-6947
Binn HOAGUAND
From: Person sending:
Sender's telephone number:
Our telecopier number is: 202-224-1891
Date
7-30-92
Time
2:30 p.m.
Number of pages:
13
Receiving person's telecopier number:
Name or description of document:
CHINTON: Health care
DEFENSE: Cowe Estimate
Table of Contents
Testimony
1
Republican Bill H.R. 5229
2
Democratic Bill H.R. 5230
3
Invitation to Testify
4
Administration Initiatives for R&D
5
White House Press Release for R&D
6
Talking Points on U.S. Competitiveness
7
Competitiveness Charts
8
Proposed '93 Budget Sheet for R&D
9
Federal R&D Funding '90--'92
10
Charts: Comparing U.S. and Japan R&D Expenditures
11
STATEMENT BY
MICHAEL J. BOSKIN, CHAIRMAN
PRESIDENT'S COUNCIL OF ECONOMIC ADVISERS
Before the
Committee on Science, Space, and Technology
U.S. House of Representatives
August 5, 1992
U.S. Competitiveness
Introduction
Thank you Chairman Brown and Ranking Member Walker, distinguished
members of the Committee, it is a pleasure to be with you today.
Much attention has focused recently upon the economy's short-term
performance and problems, particularly the need to strengthen growth to generate
jobs rapidly enough to bring down unemployment. These matters are enormously
important, and I would be pleased to discuss aspects of them if Members of the
Committee so wish, but I have been asked to focus on long-run U.S.
2
competitiveness. I appreciate the opportunity to discuss these prospects today, and I
commend the Committee for taking this longer-term perspective.
The long-term competitiveness of a nation is best reflected by its standard of
living. Unlike an individual firm or an industry, there is no readily measurable
gauge of competitiveness such as sales growth, market share, or unit cost, let alone
an explicit market valuation of the company. For the nation as a whole, the
aggregation of millions of citizens who are workers, savers, investors, and
consumers, millions of businesses, and numerous industries, the most direct measures
would be the standard of living of the population, its growth over time, and its
comparison to citizens in other countries. From this perspective, there is both good
and bad news. It is not fully appreciated, but American citizens have the highest
standard of living in the world, as traditionally measured by gross domestic product
per capita (GDP) (see chart 1 for a comparison with Japan and Germany). But the
primary foundation of improvements in standards of living are increases in
productivity--output per worker. Again, the United States has the highest level of
productivity in the world (see chart 2 for a comparison with Japan and Germany).
But, productivity growth in the United States has been too sluggish for almost a
quarter century (see chart 3).
America has a strong foundation upon which to build its future, but there are
serious challenges to surmount if we are to remain the world's strongest economy.
3
We have to increase national saving and investment. We have to increase workers'
skills and provide workers with more capital and better technology. We also have
to reduce impediments to the smooth operation of markets. To achieve these goals,
the President has proposed growth-oriented programs in the areas of tax policy,
financial reform, health care, education, and technology. He also has moved
forcefully to reduce the burden of unnecessary government regulation on the
American economy.
Defining Competitiveness In a Dynamic, Evolving Economy
The term "competitiveness" has been used in many different ways by many
different people, some of them embracing a comprehensive vision of the national
interest, others adhering to a more narrow definition of priorities. To some,
international competitiveness is measured by the ability of U.S. firms to compete
successfully with foreign producers either by producing at home and exporting--so-
called "trade competitiveness"--or by locating abroad and competing successfully
with foreign firms. However, the competitiveness of the entire economy cannot be
defined in terms of the performance of any narrow set of industries. The goods and
services exported by a country depend upon its comparative advantage--based upon
its resources, labor, and capital and how these are combined to produce goods at the
lowest cost. In any evolving, dynamic economy, changes in supply conditions,
4
world demands, or technology naturally will bring about changes in the competitive
performance of specific industries.
However, it can be very misleading to measure the competitiveness of an
economy by its balance of trade. In conjunction with other developments, a trade
surplus could be either good or bad news; a sign of strength or of weakness.
Strong, prosperous countries, such as the United States in the 1980s or Japan after
the oil shocks of the 1970s, periodically run current account deficits. Conversely,
relatively poor countries such as Romania during the last days of the Ceaucescu
regime, can run large surpluses. But I am certain that no one would want to
emulate the economic policies that created Romania's surplus and eventually the
legacy of poverty that confronts its people today.
Trade flows may, when used in conjunction with a wide array of other
indicators, be useful in evaluating our economic performance. Trade flows are not
sufficient by themselves to characterize the long-term competitiveness of the
American economy, as is obvious from the example of Romania. Hence, it is best
in taking a long-run view to focus on conditions across the economy and over
periods of time, rather than on the situation of particular industries at a given point
in time (although that may well be relevant for other purposes).
5
In fact, American history contains many examples of industries that have gone
through remarkable changes. The cotton industry was once thought of as a
preeminent industry in the United States. Its relative decline caused much concern
and cries for government intervention. However, other industries, such as railways,
steel, and textiles, emerged as leading sectors of the economy.
A more recent example of such change is the evolution of the typewriter
industry in the United States. Typewriters were once indispensable in offices. But
now, with rapid technological improvement, typewriters have been, by and large,
replaced in the United States and in other industrialized nations by cost-competitive
and more productive personal computers. No one would dispute the importance
today of the personal computer sector--in terms of job creation, earnings, and
productivity enhancement--for our overall economic performance.
The replacement of industries in which we no longer have a comparative
advantage by industries in which we now have a strong advantage, as well as the
rise of more technologically advanced sectors to replace previously important
industries represents the natural progress and evolution of a dynamic and flexible
economy. There is no doubt that one day today's personal computers will be
replaced by more advanced equipment. The point is that we should not define the
competitiveness of the U.S. economy exclusively in terms of the performance of
some narrow set of industries.
6
In fact, it is the ability of our economy to respond flexibly to change that has
made it the most competitive in the world today. Contrary to many claims that
have been made in recent years, the American economy is not in decline, and is not
being superseded by other industrial countries. But we cannot take sustained growth
at rates sufficient to maintain American economic leadership for granted. It will
require major changes in the economy and in economic policy.
Current Situation
With less than 5 percent of the world's population, America produces about a
quarter of the world's total GDP. Our GDP per capita was $22,056 in 1990,
placing the United States more than 25 percent above Germany and Japan. The
United States has the highest absolute level of productivity of any country in the
world, with a GDP per employed person of $45,918 in 1990.
The competitive position of the United States actually has improved over the
last decade. In 1991, the United States produced a greater share of the industrial
output of the OECD countries than it did in 1980.
However, America cannot take sustained, solid economic growth for granted.
To maintain our competitive position, we must continue to make progress toward
7
increasing saving and investment, promoting technological innovation, improving our
labor force, and increasing the scope for market forces in the economy.
These policies, if they are sustained, will lead to higher average rates of
growth. When small increments to growth rates are compounded over many years,
they lead to substantial differences in standards of living. It is the sustained
application of appropriate policies that underlies long-term improvements to
competitiveness.
I will now address some of the areas in which competitiveness policies can
make a difference.
Increasing Saving and Investment
Long-term improvements in competitiveness require a continuing stream of
new investment in new capital. Productivity growth and rates of investment are
highly correlated. During 1959-73, capital per worker in the private business sector
grew 2.4 percent annually while productivity grew by 2.8 percent. During 1973-89,
these figures dropped to 0.8 percent and 0.9 percent, respectively. Raising
investment rates will be crucial to raising future productivity growth.
8
High levels of investment, in turn, require high levels of saving. The gross
national saving rate of the U.S. economy has declined from over 16 percent in the
early 1960s to just under 13 percent in 1990. Clearly, raising national saving must
be an important part of the effort to bolster our competitiveness.
One of the keys to ensuring the availability of new capital is sound monetary
and fiscal policy. Low and steady inflation will reduce uncertainty and promote
investment. A successful fiscal policy over the long term would release resources
for private investment and lower the cost of capital. Towards that end, the
President has submitted budgets with a focus on both controlling the growth of
government spending and, within proposed spending categories, shifting from current
consumption to investment.
Tax policies should minimize distortions to incentives to work, save, invest
and innovate. The Administration has proposed the introduction of Family Savings
Accounts and more flexible IRAs as ways to stimulate personal saving for pre-
retirement objectives. To encourage investment, the Administration has proposed a
capital gains incentive that reduces the tax on long-term gains to 15.4 percent, a
new 15 percent Investment Tax Allowance, and simplified and liberalized treatment
of depreciation. The Administration also has proposed the establishment of
Enterprise Zones to bring entrepreneurship and opportunity to distressed areas.
9
Over the long term, a well functioning financial system is essential to ensure
that businesses and consumers that rely on credit have access to financing. The
Administration's proposals to remove archaic legal barriers, correct weaknesses in
deposit insurance, and bolster the FDIC's Bank Insurance Fund were intended to
help create a safer, sounder, and more internationally competitive financial system.
Promoting Technological Innovation
Economic growth can be enhanced by policies supporting the development of
intellectual capital. Research and development can lead to new products and more
efficient production processes that generate employment, productivity growth, and an
improved standard of living.
In many areas of technology, the gains from innovation can be captured by
private entrepreneurs, so that there are sufficient incentives for private R&D. In
these areas, innovation is best pursued by the private sector. This ensures that R&D
effort will be directed toward the most productive, market-worthy projects.
At the generic and "pre-competitive" stage of R&D, the fruits of research may
be hard to capture, and in fact may benefit others who have not contributed to the
cost of the research. In these circumstances, private entrepreneurs would be unlikely
to undertake sufficient R&D, and this is where there is an important role for
10
government-funded activities or special tax provisions to account for this
"externality." This year the Administration proposed a record $76 billion R&D
budget both for basic research and for applied research and development. To
promote private innovation, the Administration consistently has advocated making the
R&D tax credit a permanent part of the tax code. Reducing the tax rate on capital
gains also would improve the incentives for private R&D.
The Administration consistently has highlighted the importance of basic and
applied research activities and the importance of reducing barriers to innovation.
Other Administration initiatives include (1) continuing implementation of the
National Cooperative Research Act (NCRA) of 1984, which enables private
companies to form research alliances without fear of unwarranted antitrust
uncertainty; (2) proposed legislation to expand the NCRA to include joint production
ventures; and (3) redeployment of the National Weapons Laboratories' assets in
favor of broader (non-defense) objectives.
As I noted earlier, when the benefits of R&D can be appropriated by private
researchers, the choice and funding of research projects should be left up to the
market. This will ensure that resources are channeled into the most productive
research opportunities, and this allocation will be policed by the market itself. Even
when the benefits to research are not appropriable by the market, this does not
11
necessarily mean that government should step in. The economic benefits of
government-sponsored research must be weighed against their costs. Hence, the role
for government-sponsored research in our economy must be considered in light of
two standards: appropriability and the balance of costs and benefits.
Improving Labor Quality
Improved labor quality is, along with capital investment and technological
innovation, a third major factor underlying increases in productivity. Higher and
improved levels of schooling will lead to higher worker productivity. The
Administration has made improvements in the nation's educational system a high
priority. It has proposed a record $34.9 billion in funds for the Education
Department and Head Start. The President's AMERICA 2000 education reform
strategy is aimed at helping communities achieve the National Education Goals by
the year 2000. The Administration has advanced various proposals to improve the
quality of schooling by increasing choices of schooling available to middle and low
income families.
Improving labor quality does not stop at the classroom door. Through the
Job Training 2000 initiative, the Administration proposes to overhaul the current
fragmented, inefficient Federal job training programs. This initiative would improve
services to clients, gear training to local needs, ensure quality training and
12
accountability for outcomes, and allocate funding in the form of vouchers to
individuals.
Strengthening the Dynamism and Flexibility of the Private Sector
At the core of the U.S. economy's dynamism and resiliency is the flexibility
it derives from reliance on markets. The operation of the marketplace allows
competition to determine the amount of goods and services produced and the prices
at which these are bought and sold. It also promotes production on a least-cost
basis, and the channelling of investment into the most productive projects.
Government rules and regulations, when applied inappropriately, can
needlessly add to costs, distort the efficient allocation of resources, reduce the
economy's flexibility and disrupt employment. Hence, the performance of the
economy can be substantially enhanced through reform of unnecessary government
economic regulations.
As part of an ongoing effort to widen the role of market forces, the
Administration regularly reviews government regulations to ensure they are cost
effective and to minimize the regulatory burdens on the economy. In January 1992,
the President announced a 90-day moratorium on new regulations that impede
economic growth, which was later extended an additional 120 days. As part of the
13
moratorium, all government agencies were instructed to evaluate existing regulations
with regard to their effectiveness and their effect on private sector costs, and to take
actions to reduce these burdens in a manner consistent with the underlying statutes
and protecting public health and safety.
The economy's performance can be directly improved by reforming
regulations as well as eliminating them. Regulations can be designed to give firms
greater incentives to cut costs and to innovate. For example, in moving to free
competition in long-distance telephone service, the FCC has tied some of AT&T's
rates to an index that is adjusted for inflation minus a correction for expected
improvements in productivity. If AT&T reduces its costs or improves its products,
it is allowed to keep some of the profits.
Conclusion
The American economy continues to be the largest and most productive in the
world. This wealth gives America every opportunity to continue to grow and
prosper in the years ahead. However, this growth cannot be taken for granted.
Only if growth-oriented policies, such as those proposed by the President, are put in
place and implemented on a sustained basis will our living standards continue to rise
while we retain our preeminent position in the global economy.
GDP per capita
Chart 1
1990 U.S. dollars
As of 7/28/92
25,000
21,731
22,056
20,000
18,718
17,571
16,026
16,231
15,425
15,000
13,574
12,342
10,000
5,000
0
1980
1988
1990
United States
Japan
Germany
Note: Purchasing power-parity exchange rates.
Source: Bureau of Labor Statistics.
Productivity
Chart 2
1990 U.S. dollars
50,000
45,918
40,000
36,074
35,040
30,000
20,000
OUENAZY
JARAZ
OTATED
10,000
0
1990
Note: Purchasing power-parity exchange rates.
Productivity is defined as GDP per worker.
Source: Bureau of Labor Statistics.
Trends in Productivity
Chart 3
1960-90
1990 U.S. dollars
50,000
40,000
30,000
20,000
10,000
0
60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90
U.S.
Germany
Japan
Note: Purchasing power-parity exchange rates.
Productivity is defined as GDP per worker.
Source: Bureau of Labor Statistics.
H.R. 5229
Fundamental Competitiveness Act of 1992
(introduced by Congressman Walker)
The following is an outline of the Fundamental
Competitiveness Act of 1992, known as H.R. 5229.
Title I--Public Debt Reduction
totalytas
Allows taxpayers to designate up to ten percent of their
ref
5056
taxes toward debt reduction. For every dollar of tax revenue
applied to debt reduction, there would be an equivalent reduction
in Federal spending through an across-the-board sequestration
excluding net interest, social security, and deposit insurance.
Title II--Capital Formation
This title provides for tax incentives that aim at
encouraging private investment, especially in small firms.
Provisions include:
/
1) Making the R&E tax credit permanent.
2) Cutting the capital gains tax through an exclusion that
increases with the amount of time an asset is held. This
exclusion would be 10% for assets held for only one year, but
would scale up to 100% for those held for ten years or more.
3) Instituting a 50% captial gains exclusion for gains
\
derived from initial stock offerings that are held for two years
or more.
4) Indexing corporate assets to inflation. depresation
5) Allowing the deductibility of dividend payouts. This
would eliminate the present bias descending from the
deductibility of interest on corporate debt.
6) An initial 10% tax credit for purchases of new
machinery.
7) Treating capital losses derived from investments in
manufacturing firms as ordinary losses.
8) Creation of an individual tax exemption of $2,500 for
interest and dividend income.
9) Allowing new businesses to deduct capital losses from
ordinary income.
2
Title III--Antitrust
Provisions under this title would base merger analysis on
world market shares, and would allow firms participating in joint
R&D under the National Cooperative Research Act to jointly
produce as well.
Title IV--Business Liability
This title aims at civil justice reform. The first main
subtitle deals with professional liability. It would put limits
on liability unless negligence were proved, would put a cap on
attorneys' fees, and would set criteria for when punitive damages
could be awarded. It also encourages the establishment of
alternative dispute resolution mechanisms.
The second main subtitle addresses product liability. It
would set uniform standards of product seller liability and
uniform standards for punitive damages. Joint liability claims
would not be allowed, only several. The use of alternative
disputed resolution mechanisms is encouraged.
Title V--Long-Term Investment
This title eliminates the requirement for firms to issue
quarterly reports. Presumably this would encourage them to
maximize in the long term.
Title VI--Competitiveness Risk Assessment
Mandates that agencies examine all costs and benefits of any
regulation before its issuance.
Title VII--Department of Manufacturing and Commerce
This would rename the DOC as the Department of Manufacturing
and Commerce, and would mandate it to issue a report on the
feasibility of consolidating Federal agencies involved in
manufacturing R&D.
Title VIII--Amendments to the Stevenson-Wydler Technology
Innovation Act of 1980
Makes Technology Transfer Act of 1986 uniform across
agencies, and would allow some software developed jointly with
industry to be copyrighted.
H.R. 5230
American Technology and Competitiveness Act
(introduced by Congressman Brown)
The following is an annotated outline of the American
Technology and Competitiveness Act, known as H.R. 5230.
Title I--General Provisions
A statement of findings, purposes, and goals. Findings
include blaming foreign competition for a drop in the real
standard of living during the past decade, and attributing "the
passive nature of United States civilian technology policy" to
the inability "of American companies to compete in certain high
technology fields."
Title II--Manufacturing
This title would establish a Commerce-chaired advisory board
aimed at helping the diffusion of technology. It proposes a
leadership role for Commerce in assisting US industry to develop
the modern manufacturing technology necessary to meet foreign
competition.
Such an advisory board is unnecessary. Its purpose is
served by FCCSET, the Federal Coordinating Council on Science,
Engineering, and Technology.
The title would also establish a nationwide network of
manufacturing outreach centers. These centers would be
technological clearinghouses that would help (especially small-
and medium-sized) businesses improve their means of
manufacturing. Commerce would be required to submit a 5-year
plan for the program to Congress. Funding would be provided by
Federal, state, and local governments, and by private
contributors.
This is presumably an expansion of the National Technical
Information Service (NTIS). Presently, NTIS is a small agency
within Commerce that serves as a clearinghouse for information
regarding generic technologies. This provision would change its
function sharply toward applied technologies.
There are also provisions establishing an Advanced
Manufacturing Program. This program would further link the
Federal government to private industry through its activities
which would include research, development, training and
information exchanges.
2
The President's 1993 proposes $321 million for non-defense
Advanced Manufacturing R&D, an increase of 27% over 1992 levels.
This funding is limited, however, to a) generic manufacturing
technologies with broad applications, and b) technologies which
are directly applicable to the procurement needs of government
programs.
The Advanced Manufacturing Program proposed here would
create collaborative technology development programs to develop
and transfer both applied and generic manufacturing technologies.
Last, the title would expand the role of Manufacturing
Technology Centers. Presently, the government funds these for up
to six years; thereafter, they would be supported by industry
contribution or disbanded. This title would eliminate the six-
year funding limit and expand the range of services that such
centers could offer.
Commerce has opposed the expansion of the MTCs on the
grounds that elimination of the six-year horizon would induce the
program to pre-empt, rather than enhance, research and
development in the private sector.
Title III--Critical Technologies
Subtitle A--Miscellaneous
Notes the success of foreign governments in targeting
critical technologies, and cites agriculture and aerospace as two
areas where commercial success has resulted from strong Federal
support. It further claims that there is a need for a greater
Federal role in bridging the gap between the development and
application of technologies.
Mandates an annual report, prepared by Commerce, of the
effects of international trade negotiations on domestic R&D
programs.
This report would duplicate the efforts of other agencies.
Specifically, USTR already prepares a similar report.
Subtitle B--Council on Technology and Competitiveness
This subtitle would establish an Executive Office of the
President group comprised of senior administration officials
which would be tasked with developing a plan to ensure United
States' technological leadership in critical technologies.
The CEA has already voiced opposition to this provision, on
the grounds that such a council would be unnecessary and
duplicative. A letter to Representative Brown has been drafted
3
to this effect. Interagency coordination of the Administration's
R&D policy is presently carried out by FCCSET.
Subtitle C--Advanced Technology Program
The present ATP would be expanded to include "as many
critical technologies as is appropriate." This subtitle would
also require the establishment of two industry consortia in
critical technologies. These consortia would not be limited to
generic, precompetitive technology, but would include applied
technology.
The ATP is an experimental program that provides matching
funds to U.S. businesses for industry-led, generic,
precompetitive R&D. The 1993 Budget proposed a 36% increase in
the program's funding to $68 million.
Expanding the ATP to include applied technology would
clearly be against Administration policy. It would almost
certainly lead to "picking winners and losers" within and among
industries. A draft SAP which is now circulating presently
states the Administration's opposition to this provision, but
does not raise it to veto threat level.
Subtitle D--Technology Commercialization Loans
This confers upon the Secretary of Commerce the authority to
make loans to small and medium-sized businesses "engaged in
research, development, demonstration, or exploitation of advanced
technologies" at below-market rates.
Commerce has come out against Subtitle D and E on the
grounds that it lacks the expertise to conduct such a financing
program. It also notes that such a program already exists under
the auspices of the SBA. A draft SAP is presently circulating
that recommends veto of the bill unless these two subtitles are
deleted.
Subtitle E--Critical Technologies Development
This is an act within an act. It addresses the "problem" of
the lack of venture capital available to small R&D firms. It
cites "financial distress" in the US as an impediment to the
development of critical and other technologies and claims it is,
therefore, of "national interest for the Federal Government to
take such actions as may be necessary and appropriate" to
increase the level of development of these technologies and
"correct market failures."
This part of the legislation would allow small R&D firms to
qualify for government support in the form of equity capital.
4
The government would thus subsidize small R&D firms by purchasing
blocks of nonvoting, nonparticipating stock.
See above.
Title IV--International Standardization
This provision would expand the Standards Pilot Program and
require that Commerce submit a report to Congress concerning the
role the Federal Government should play in assisting US companies
with conforming to foreign product standards and in developing
global standards.
Title V--Miscellaneous Provisions
Title VI--Competitiveness Research, Data Collection, and
Evaluation
This sections claims that "Federal programs to enhance
competitiveness should yield a greater return on investment" than
would private sector funds. It advocates a Federal research
program, again directed by Commerce, "to promote innovation and
development of new technologies."
Title VII--Educational and Workforce Training
Establishes the goal of furthering the industrial, technical
and managerial skills of American youths. For this purpose,
several Federal grant programs are proposed. These programs
would be administered through the Departments of Commerce, Labor
and Education, as well as the National Science Foundation.
Title VIII--Tax and Investment Incentives
Subtitle A--Tax and Investment Incentives
Provides incentives for investment in three ways: (1) the
research and experimentation credit is made permanent, (2)
capital gains are indexed for inflation, and (3) a 50-percent
exclusion for captial gains from investments in certain small
businesses is established.
Subtitle B--Revenue Provisions
This section details ways to raise revenue for the grant
programs. This is accomplished mainly through taxing high-income
taxpayers.
5
Title IX--National Security Reinvestment
Subtitle A--Advanced Manufacturing Equipment Leasing Corporation
In order to expand the commercial market for Department of
Defense contractors, this section proposes the establishment of a
corporation, chartered by Defense, which would buy advanced
manufacturing equipment from Defense contractors and lease that
equipment through the Commerce manufacturing outreach centers.
Subtitle B--Science and Mathematical Educational Reinvestment
This program would attempt to retrain and redirect those
displaced military personnel and defense contractor employees
into secondary and post-secondary mathematics and science
teaching positions.
Subtitle C--National Security Retraining Fellowships
This proposal would again aid displaced defense engineers
and scientists by establishing fellowships so that they may
broaden their expertise and more easily find civilian employment.
Subtitle D--Multiprogram Laboratory Conversion
Authorizes the Department of Energy to take 10% of Federal
R&D funding at multiprogram laboratories and redirect it toward
joint R&D projects with private industry.
Subtitle E--Research and Development Spending
This section declares the Congressional belief that any
reduction in the R&D budget for Defense should be balanced by
equal increases in civilian R&D spending.
GEORGE E. BROWN, JR., California, CHAIRMAN
ROBERT S. WALKER, Pennsylvania
F. JAMES SENSENBRENNER, Jr., Wisconsin
SHERWOOD L. BOEHLERT, New York
JAMES H. SCHEUER, New York
TOM LEWIS, Florida
MARILYN LLOYD, Tennessee
DON RITTER, Pennsylvania
DAN GLICKMAN, Kansas
SID MORRISON, Washington
HAROLD L. VOLKMER, Missouri
U.S. HOUSE OF REPRESENTATIVES
RON PACKARD, California
HOWARD WOLPE, Michigan
PAUL B. HENRY, Michigan
RALPH M. HALL, Texas
HARRIS W. FAWELL, Illinois
AVE McCURDY, Oklahoma
LAMAR SMITH, Texas
RMAN Y. MINETA, California
M VALENTINE, North Carolina
COMMITTEE ON SCIENCE, SPACE,
CONSTANCE A. MORELLA, Maryland
DANA ROHRABACHER, California
OBERT G. TORRICELLI, New Jersey
AND TECHNOLOGY
STEVEN H. SCHIFF, New Mexico
RICK BOUCHER, Virginia
ToM CAMPBELL, California
TERRY L. BRUCE, Illinois
JOHN J. RHODES, III, Arizona
RICHARD H. STALLINGS, Idaho
JOE BARTON, Texas
JAMES A. TRAFICANT, Jr., Ohio
SUITE 2320 RAYBURN HOUSE OFFICE BUILDING
DICK ZIMMER, New Jersey
HENRY J. NOWAK, New York
WAYNE T. GILCHREST, Maryland
CARL C. PERKINS, Kentucky
WASHINGTON, DC 20515-6301
SAM JOHNSON, Texas
TOM McMILLEN, Maryland
GEORGE ALLEN, Virginia
DAVID R. NAGLE, lowa
(202) 225-6371
JIMMY HAYES, Louisiana
JERRY F. COSTELLO, Illinois
RADFORD BYERLY, Jr.
JOHN TANNER, Tennessee
Chief of Staff
GLEN BROWDER, Alabama
MICHAEL RODEMEYER
PETE GEREN, Texas
Chief Counsel
RAY THORNTON, Arkansas
JIM BACCHUS, Florida
CAROLYN C. GREENFELD
TIM ROEMER, Indiana
Chief Clerk
BUD CRAMER, Alabama
DICK SWETT, New Hampshire
July 9, 1992
DAVID D. CLEMENT
Republican Chief of Staff
MICHAEL J. KOPETSKI, Oregon
JOAN KELLY HORN, Missouri
ELIOT L. ENGEL, New York
JOHN W. OLVER, Massachusetts
The Honorable Michael J. Boskin
Chairman
Council of Economic Advisors
The White House
Washington, DC 20500
Dear Mr. Boskin:
We are pleased to invite you to testify before the Committee on the Administration's views
and proposals on U.S. competitiveness from the most comprehensive point of view possible. The
hearing can be set to accommodate your schedule before the August recess.
We are most interested in your comments and recommendations in regard to HR 5229,
the Fundamental Competitiveness Act of 1992, and HR 5230, the American Technology and
Competitiveness Act. These bills attempt to address the root causes of the problem and go well
beyond efforts to date. The Science Committee is interested in examining the issue in its totality
and not in just receiving testimony on proposals solely within its jurisdiction. This would be an
important opportunity for input into an issue that Congress will consider on the floor this session.
Specific recommendations regarding Congressional action would be welcomed.
Arrangements and details can be coordinated with Chris Wydler at 225-6684.
Sincerely,
George Chang. BohWalh
George E. Brown, Jr.
Robert S. Walker
Chairman
Ranking Republican
Bush Administration Initiatives in Research and Development
BASIC RESEARCH
Superconducting Supercollider (SSC)
The SSC is a 54-mile circular tunnel in Texas that would
enable empirical research in high-energy physics. The 1993
Budget proposes $650 million for construction. Outlays have
consistently been considerably less than the President's
proposed level (at 75-90%).
- The House recently voted to discontinue the project.
- Construction is anticipated to take ten years, if funding
is appropriate as the President requests.
- OMB estimates that construction of the supercollider
would support 7,900 jobs.
National Science Foundation
NSF funding supports much of the scientific basic research
that is conducted within America's universities.
- One of the Administration's continuing goals has been to
double the NSF budget [from what level] by 1994. The
1993 Budget proposes an 18% increase over 1992 levels to
this end.
- NSF outlays have been well over 90% of Budget proposals
in each of the past three years.
- An appropriations subcommittee has recommended $2.7
billion in funding this year, an increase of over 5% from
1992 outlays, but 10% lower than that proposed by the
President.
U.S. Global Change Research Program
OMB calls this "the most advanced program on global change
research issues in the world." This research would help
broaden our understanding of such issues as global warming
and ozone depletion.
- The Budget proposes $1.4 billion, an increase of 24%, in
funding for 1993.
- To date, Congress has cut well over $100 million from the
President's request.
2
Agricultural National Research Initiative (NRI)
This program funds various basic research initiatives in
agriculture, centering on advances in food quality and
nutrition.
- Funding for this program began only in 1991. This year's
budget proposes $150 million, an increase of $52 million
over 1992.
- A House-passed appropriations bill holds funding at 1992
levels. The bill, however, includes $36 million in
specific research grants not requested by the President
and not subject to peer review.
Biotechnology Research
Funding supports research for new biotech applications in
many fields, including health, manufacturing, and the
environment.
- The Budget proposes $4 billion in funding, an increase of
$271 million (a 7% increase) over 1992 outlays.
- To date, Congress has reduced appropriations by over $40
million below the President's requested level.
Human Genome Project
Supports genetic research, with the goal of analyzing "the
entire complement of human genetic material at the molecular
level" within 15 years.
- The Budget proposes a 7% funding increase, to $175
million.
- To date, $7 million out of the proposed $11 million
increase has been cut by House appropriation bills.
3
APPLIED RESEARCH
High Performance Computing and Communications (HPCC)
The HPCC initiative provides funding for research and
academic training needed to significantly accelerate the
availability of the next generation of high performance
computing systems and digital communications networks.
Because of the small scale of the market and the high cost
of research, high performance computing has not attracted
the private sector R&D investments typically seen in the
broader computer industry.
- The Budget proposes $803 million for this initiative, an
increase of 23% over 1992 levels.
- Congress has funded the HPCC initiative above the levels
requested by the President ever since the program began
three years ago.
- However, House appropriations action to date has cut $82
million from the President's request.
Advanced Materials and Processing
This is a new initiative that would fund research on
materials synthesis and processing, areas critical to the
development of new materials and the qualitative improvement
of old ones.
- The Budget requests $162 million for this initiative.
- Most of this funding has been effectively eliminated at
the subcommittee level within the House.
Advanced Manufacturing R&D
This program supports research in non-defense manufacturing,
a field that is addressed in both H.R. 5229 and H.R. 5231.
- The Budget proposes over $1 billion in funding, including
$105 for a new manufacturing research initiative under
the NSF, and $27 million for National Institute of
Standards and Technology (NIST) programs.
- House appropriation committees have either cut or
recommended cuts of almost $100 million to date.
Energy Technology R&D
4
Funding supports research for "high-payoff technologies and
strategies to increase the efficiency of energy use. This
research was elaborated in the National Energy Strategy.
- The Budget proposes $914 million, an increase of $140
million.
- A House appropriations bill cut $46 million from this
request, including all funding for maglev train research
40% of funding for natural gas research.
Fusion R&D
Funding supports a research partnership with Japan, Russia,
and the EC aimed at advances in science and engineering for
nuclear fusion technologies.
- The President requested $360 million for this end, an
increase of $23 million over 1992 levels.
- The House has passed appropriations of $340 million to
fund this program.
Transportation R&D
Funding supports high priority R&D on aviation and high-
speed rail projects under NASA and DOT. Aims at
improvements in air traffic control, intelligent
vehicle/highway systems, satellite-based navigation, etc.
Funding for the National Aerospace Plane is included here.
- The Budget requests almost $1.4 billion in funding,
including $260 million for the National Aerospace Plane.
- To date, $90 million has been cut in House appropriations
committees, including all $80 million requested for
NASA's portion of the NAP.
Public Health Research
This mainly includes biomedical research, the Women's Health
Initiative, and AIDS research.
- $4.8 billion was proposed for these projects in the
budget, including over $1.2 billion for AIDS research and
an 80% increase for the Women's Health Initiative.
- No Congressional action has been undertaken to date.
Space Research and Technology
5
This includes research for improvements in robotics, launch
vehicles, and other space-related areas.
- $305 million is proposed for this end, 12% more than 1992
levels.
- Various Congressional committees have made funding
recommendations regarding space research. All have been
below the level requested in the Budget.
THE WHITE HOUSE
Office of the Press Secretary
For Immediate Release
July 30, 1992
The Bush Administration's Policies for an
American Technological Revolution
FACT SHEET
The President today met with the scientists, management and
workers at the world's largest science and engineering project,
the Superconducting Super Collider (SSC). He reaffirmed his
continuing strong support of the federal investment in this
unprecedented scientific undertaking which will provide broad
societal benefits.
The Problem
Technological innovation is essential to sustained economic
growth. Those nations that innovate most successfully will
compete best in an increasingly integrated global economy.
International competitiveness requires needed investments in
basic research and efficiently commercializing the results of
that research. It involves a technology policy that recognizes
the important role of entrepreneurs, and the need for flexibility
in deploying resources to their most efficient uses.
The Bush Administration Principles
Since 1989, President Bush has aggressively pushed a strong
science and technology agenda, and he has proposed devoting an
unprecedented level of resources to R&D.
The President's science and technology agenda relies on six
basic principles:
The private sector must be free to determine its own
research priorities.
The Federal government must promote sound tax policies
that stimulate private sector investment in R&D and
technological innovation.
The Federal government must assure that its regulations
do not impede firms from developing products or from
bringing safe, new products to market.
-2-
The Federal government must support a strong program of
basic and applied R&D, which provides broad societal
benefits.
The Federal government must work cooperatively with the
private sector in the development of generic or
enabling technologies.
Federally-funded technology must be transferred swiftly
and effectively to the private sector for
commercialization.
The President has taken these six principles and developed a
comprehensive strategy for enhancing America's technology prowess
and competitiveness. It includes:
Opening Up Foreign Markets to U.S. Goods;
Accelerating Technology Transfer;
Investing in the Future: Strengthening Our Knowledge
Base and Increasing Federal Support for Emerging
Technologies;
Educating Our Students for a World of Technology;
Coordinating with the Private Sector in Consortia and
Other Arrangements to Develop Generic or Enabling
Technologies;
Stimulating Private Sector R&D Through Sound Tax
Policies; and
Promoting Technology Through a Sound Regulatory System.
Opening Up Foreign Markets to U.S. Goods
The U.S. remains the world leader in the export of
scientific and technological knowledge. Our high tech exports
have increased by two-thirds since 1987, and we enjoy a $37
billion trade surplus of high tech exports with the rest of the
world. The President is determined to maintain this position by
opening new foreign markets, and by protecting the intellectual
property rights of those on the leading edge of scientific and
technological innovation.
1.
Bilateral Agreements with Japan. The Administration
has opened Japanese markets to U.S. high tech goods
through trade agreements covering supercomputers,
satellites, semiconductors, and amorphous metals.
-3-
2.
Intellectual Property Rights in the Uruguay Round. The
Administration is currently negotiating to ensure that
the U.S. science and engineering base is protected from
foreign pirating of technology.
3. North American Free Trade Agreement (NAFTA). The
Administration is completing the negotiations on the
NAFTA which will open new opportunities for American
exporters and the free flow of investment capital into
the technologically intensive fields of the
environment, medicine, agriculture, electronics and
telecommunications.
4.
U.S./Asia Environmental Partnership. This
unprecedented coalition of U.S. and Asian government
units, businesses, and community groups is working
together to enhance Asia's environment. This will
result in the greater export of American technological
know-how and equipment.
Accelerating Technology Transfer
The Federal government has invested billions of dollars in
creating the world's finest, most advanced research laboratories.
This valuable national resource can assist civilian research
efforts to investigate and develop commercially viable
technologies.
Technology Transfer. The FY 1993 Budget proposes a
significant increase in technology transfer activities,
including almost 1,500 Cooperative Research and Development
Agreements (CRADAs) between government laboratories and
private industry, an increase of 60 percent over the past
two years; approximately 4,500 new invention disclosures;
2,000 patent applications; and almost 300 technology
licenses awarded.
The Administration's National Technology Initiative. Ten
conferences have been held across the country, and five more
are scheduled between now and December 1, 1992. These
conferences act as catalysts for creating new partnerships
among government, universities and American companies to
better translate new technologies into marketable goods and
services. A list of the conferences is attached.
Expanding the Role of the National Laboratories. The FY
1993 Budget proposes that National Laboratories play a
greater role in high priority areas of civilian applied R&D
by helping to form R&D consortia and other collaborative
arrangements led by industry and academia.
-4-
Improving Linkages Between Federal and Industry R&D.
Presidential initiatives proposed in the FY 1993 Budget call
for increased private sector roles in setting directions for
federally funded R&D in critical areas such as high
performance computing, advanced materials and biotechnology.
Fostering Entrepreneurial Activity in Small High Technology
Businesses. The Administration has removed impediments to
the success and growth of small high technology businesses
that are responsible for a disproportionate share of new
jobs and innovations.
Investing in the Future: Strengthening Our Knowledge
Base and Increasing Federal Support for Emerging Technologies
The Administration remains committed to funding basic and
applied research, and to working with industry to develop generic
technologies but believes that the market competition is best
able to identify winners and losers.
The President's FY 1993 budget proposes $76.6 billion in
research and development. This represents an increase of
nearly $2 billion, or 3 percent. Federal civilian R&D would
increase by 7 percent. The budget proposes over $14 billion
for basic research, an increase of 8 percent, and over $17
billion for civilian applied research and development, an
increase of 6 percent.
A.
Initiatives in Basic Research
Superconducting Super Collider (SSC). The FY 1993 Budget
proposes $650 million to support continued prototype
superconducting magnet development, and construction of
support facilities and a test tunnel segment. The budget
maintains the 10-year project schedule approved last year.
Doubling the National Science Foundation (NSF) Budget by
1994. The budget proposes an increase of 18 percent for
NSF, including a 21 percent increase for basic research.
Increasing Support for Individual Investigators. The budget
proposes roughly $8 billion, an increase of 9 percent, for
individual investigators funded by the Departments of Health
and Human Services and Energy and the National Science
Foundation.
U.S. Global Change Research Program (USGCRP). The budget
proposes $1.4 billion, an increase of 24 percent, for this
initiative to understand more fully the Earth's climate
system and to develop sound policies concerning issues such
as ozone depletion and global warming.
-5-
Astronomy and Astrophysics. The budget proposes a total of
$890 million for these programs. This proposal is
consistent with the recommendations of a recent report of
the National Research Council.
Agricultural National Research Initiative (NRI). The budget
proposes a 51 percent increase to fund six areas of
research: natural resources and the environment; nutrition,
food quality and health; plant systems; animal systems;
markets and trade policy; and processes antecedent to adding
value and developing new products.
Biotechnology Research. The budget proposes $4 billion, an
increase of $271 million or 7 percent, for a new coordinated
Presidential initiative in biotechnology involving 12
Federal agencies.
B.
Applied Research and Development
High Performance Computing and Communications (HPCC). The
budget proposes $803 million, an increase of 23 percent, for
the second year of the President's High Performance
Computing Initiative.
Advanced Material and Processing. The budget proposes $1.8
billion, an increase of 10 percent, for a new Presidential
initiative intended to improve the manufacture and
performance of materials.
Advanced Manufacturing R&D. The budget proposes a total of
over $1 billion, including $321 million for nondefense-
related manufacturing R&D.
Energy Technology R&D. The budget proposes $914 million, an
18 percent increase, for targeted energy technologies.
These investments, guided by the National Energy Strategy,
will increase energy efficiency, and generate advances in
new electricity technologies.
Fusion R&D. The budget proposes a 7 percent increase for
the development of energy from nuclear fusion. This
initiative maintains the U.S. commitment to the
International Thermonuclear Experimental Reactor (ITER)
engineering design.
Transportation R&D. The budget proposes nearly $1.4
billion, an increase of 17 percent, for transportation
research and development in the fields of high-speed rail,
aviation and aeronautics technologies. This proposal
includes $260 million for the National Aerospace Plane
(NASP) program.
-6-
Space Research and Technology. The budget proposes $305
million, a 12 percent increase, for NASA space technology
development.
Protecting the Public Health. The budget proposes $4.8
billion for applied research and development at the
Department of Health and Human Services, including over $1.2
billion for research on Human Immunodeficiency
Virus/Acquired Immune Deficiency Syndrome (AIDS) and an 80
percent increase for the Women's Health Initiative.
C.
Expanding the Geographical Frontier of Space
Space Station Freedom. The budget proposes $2.2 billion, an
11 percent increase, for fabrication and testing of critical
components in preparation for first element launch in 1996.
Improving Access to Space. The budget proposes $5.4 billion
for civil space transportation, including the Space Shuttle,
commercial expendable launch vehicle services, and other
initiatives such as the SpaceHab module for microgravity
research.
New Launch System. NASA and the Department of Defense will
propose $250 million for joint development of a new, more
flexible and powerful launch system.
Space Exploration. The budget proposes a total of $586
million for space exploration programs, including the
planned mission to Saturn, two new robotic missions to
explore the moon, and advancing key technologies needed for
future missions to Mars.
Educating Our Students for a World of Technology
Our education system must produce American workers able to
compete with any in the world. The National Education Goals call
for U.S. students to be first in the world in science and
mathematics by the year 2000.
The President has proposed to Congress $2.09 billion
for science and mathematics education programs, an
increase of 7 percent over 1992.
To enhance teacher training, the President has proposed
federally-funded math and science training for 770,000
U.S. teachers, almost half of the total number of
teachers in those fields.
The President's budget proposes a series of
-7-
demonstration projects using electronic communications
technologies to enhance math/science curricula.
Cooperating with the Private Sector in Consortia and
Other Arrangements to Develop Generic or Enabling Technologies
It has long been recognized that it is not possible to
predict where, when or to whom the benefits of basic research
will flow so that no single institution can justify the necessary
investment. The same argument applies to the development of
generic or enabling technologies. Examples of Federal support
for cooperative activity with the private sector in the
development of generic technologies include:
Sematech, a consortium in which the Federal government
and the computer industry cooperate to develop
technologies for semiconductor chip manufacture that
will leapfrog the next generation and allow U.S.
industry to recapture a substantial share of the
international market for these chips.
The Battery Consortium, involving the Federal
government, major automobile manufacturers and a number
of electrical battery companies, is working towards the
development of storage batteries for electric
automobiles.
The Automotive Composites Consortium, involving the
Federal government (through the National Institute for
Standards and Technology) and major automobile
manufacturers, is developing and testing composite
substitutes for large metal automotive components (e.g.
front-end assemblies) that will result in more fuel
efficient but still safe automobiles, and technology
with much wider industrial application.
Stimulating Private Sector R&D Though Sound Tax Policies
Fostering technological innovation requires tax policies
that encourage research, investment, and risk-taking.
Research and Experimentation Tax Credit. Since taking
office, the President has urged the Congress to make
permanent the current 20 percent research and
experimentation tax credit.
R&D Allocation Rules. The President has called on the
Congress to extend the so-called section 861 R&D Allocation
Rules, which foster R&D activities in U.S. labs. When
Congress failed to act, the President used his administra-
-8-
tive powers to extend this important incentive for 18
months.
Capital Gains Tax Cut. Since taking office, the President
has repeatedly urged the Congress to cut the capital gains
tax, which raises both the cost of developing new
technologies and the cost of purchasing high tech goods.
Promoting Technology Through A Sound Regulatory System
Federal regulatory policy should protect health and safety
and promote competition. Where possible, the Federal government
should eliminate unnecessary regulatory burdens that stifle
technological innovation and product development.
Biotechnology. The U.S. is the world leader in
biotechnology. This $2 billion domestic industry is
expected to increase to $50 billion by the end of the
decade. Some of the most promising advances will be in new
drugs and gene therapies to treat existing diseases.
Biotechnology will also produce healthier foods, safer
pesticides, additional energy resources, and innovative
environmental clean-up technologies.
Drug Approval Process. On April 9, 1992, the Administration
announced four actions to speed up the availability of new
drugs and dramatically reduce unnecessary burdens in the
drug development process: accelerated approval for
"breakthrough" drugs for patients with life-threatening or
serious illnesses; a new "parallel track" system under which
promising new drugs for treating AIDS and other HIV-related
diseases will be made widely available as early as possible;
external review of some categories of new drug applications
by qualified non-government experts; and, streamlined animal
testing to reduce the testing time of new human drugs in
animals.
Extending the National Cooperative Research Act (NCRA). The
NCRA of 1984 permitted firms to join forces on research
projects without the fear of per se antitrust violations.
The Administration supports legislation to expand the NCRA
to permit firms to jointly produce goods.
Advanced Television. The FCC is moving to promulgate new
rules on a standard for high definition television. This
standard will likely embrace the digital technologies
pioneered by U.S. private sector firms, which has leap-
frogged the analog technologies of foreign competitors.
# # #
NATIONAL TECHNOLOGY INITIATIVE CONFERENCES
DATE
LOCATION
TECHNOLOGY FOCUS
2/12/92
Cambridge, MA
Environment,
Biotechnology
3/4/92
Austin, TX
Energy (Oil & Gas),
Electronics
3/24/92
Orlando, FL
Aerospace, Food
4/9/92
Research Triangle, NC
Biotechnology,
Environment
4/23/92
Cleveland, OH
Materials,
Advanced Manufacturing
5/14/92
Seattle, WA
Transportation,
Environment
5/29/92
Pasadena, CA
Aerospace,
Biotechnology,
Environment
6/11/92
Golden, CO
Natural Resources,
Communications
6/25/92
Kansas City, MO
Agricultural
Technology, Advanced
Manufacturing
7/9/92
Gaithersburg, MD
Life Sciences,
Information Technology
9/15/92
New Brunswick, NJ
Transportation,
Electronics
9/25/92
Chicago, IL
Materials,
Biotechnology
10/15/92
Palo Alto, CA
Environment,
Information Technology
10/27/92
Pittsburgh, PA
Materials,
Life Sciences
12/1/92
Baltimore, MD
Transportation,
Aerospace
July 30, 1992
TO:
MICHAEL BOSKIN
FROM:
K.C. FUNG
STEVE KAMIN
SUBJECT: TALKING POINTS ON U.S. COMPETITIVENESS, DRAFT TESTIMONY,
AND CHARTS
Introduction
Given the attention focused on short-term recovery issues
currently, the opportunity to take a longer view is welcome.
The long-term competitiveness of the United States is
best reflected by our standard of living. The U.S.
remains the world's most competitive economy.
However, to maintain our position, we must meet serious
challenges. We must promote savings, investment,
technological innovation, and labor force quality, as
well as expand the scope for market forces.
Our Current Competitiveness Position
Competitiveness cannot be defined in terms of the short-term
performance of any narrow set of industries. A longer-run,
economy-wide view must be taken.
Our history contains many examples of industries that
initially were important to the U.S. economy, but
subsequently were lost to us without ill effects.
-
Cotton
-
Typewriters
It is our economy's ability to respond flexibly to change
that has made it so competitive.
The facts do not support the assertion that the United
States is in decline. With less than 5 percent of the
world's population, America produces more than a
quarter of the world's total GNP.
Our citizens have the highest standard of living in the
world.
-
U.S. GDP per capita of $22,056 in 1990, the
latest year for which comparable data are
available, places the United States more than
25 percent above Germany and Japan, based on
BLS data that adjust for purchasing power
differences.
The U.S. has the highest absolute level of productivity
of any country in the world, with a GNP per employed
person of $45,918 in 1990.
As of 1991, the U.S. produced a larger share of the
industrial output of the OECD than it did in 1980.
The share of manufacturing in U.S. real GDP has risen
from the mid-1970s to 1989, the latest available date.
However, steps must be taken to maintain our
competitive position. These will not boost our income
immediately, but will make a big difference if
sustained over time.
Increasing Savings and Investment
Sustained U.S. economic growth requires a continuing
stream of investment in new capital, which in turn
requires a high rate of savings.
-
Productivity growth and investment rates are highly
correlated. During 1959-73, capital per worker in the
private business sector grew 2.4 percent annually while
productivity grew by 2.8 percent. During 1973-89,
these figures dropped to 0.8 percent and 0.9 percent,
respectively.
-
The gross rate of savings in the U.S. economy moved
from 16 percent in the early 1960s to under 13 percent
in 1990.
One of the keys to ensure the availability of new
capital is sound monetary and fiscal policy. Low and
steady inflation will reduce uncertainty and promote
investment. A successful fiscal policy over the long
term would, by balancing the budget, release resources
for private investment and lower the cost of capital.
-
The President has submitted budgets with a focus on
both controlling the growth of government spending and,
within proposed spending categories, shifting from
current consumption to investment.
Tax policy should aim to minimize distortions to incentives
to save and invest.
-
The Administration has proposed the introduction of
Family Savings Accounts as a way to stimulate personal
saving for pre-retirement objectives.
-
The Administration has proposed (1) a capital gains
incentive that reduces the tax on long-term gains to
15.4 percent; (2) a new 15 percent Investment Tax
Allowance; and (3) simplified and liberalized treatment
of depreciation.
-
The Administration also has proposed the establishment
of Enterprise Zones to bring entrepreneurship and
opportunity to distressed areas.
Over the long term, a well functioning financial system
is essential to ensure that business and consumers that
rely on credit have access to the funds they need.
Promoting Technological Innovation
Economic growth is enhanced by policies supporting the
development of our intellectual capital.
In areas where the gains from innovation can be captured by
private entrepreneurs, so that there are sufficient
incentives for private R&D, innovation is best pursued by
the private sector. This ensures that R&D effort will be
directed toward the most productive, market-worthy projects.
-
To promote private innovation, the Administration has
consistently advocated making the R&D tax credit a
permanent part of the tax code.
-
Reducing the tax rate on capital gains would also
improve the incentives for private R&D.
At the pre-competitive stage of R&D, when gains to
innovation are hard to capture and private R&D
therefore would be unlikely to occur, there is an
important role for government-funded research
activities.
-
This year we proposed a record $76.6 billion R&D budget
both for basic research and for applied research and
development. (check)
The Administration has consistently highlighted the
importance of basic and applied research activities and
the importance of reducing barriers to innovation.
Other Administration initiatives include:
-
Continuing implementation of the National Cooperative
Research Act (NCRA) of 1984, which enables private
companies to form research alliances without fear of
antitrust violations.
-
Proposed legislation to expand the NCRA to include
joint production ventures.
-
Redeployment of the National Weapons Laboratories'
assets in favor of broader (non-defense) objectives.
A list of technology initiative advanced by the President is
attached.
The Administration is opposed to any sort of industrial
policy in which the government, not the market, would
pick winners and losers.
-
The government possesses no special expertise in this
area relative to the private sector.
-
We remain competitive, world leaders in many technology
based industries -- pharmaceuticals, aerospace, and
computers -- notwithstanding our lack of an industrial
policy.
-
"Success cases" of foreign government support for
particular high-technology industries are not as
successful as they might appear to be.
-
For example, Airbus has become prominent at the
cost of billions of dollars in government
subsidies. These have benefited a small group of
producers while reducing the welfare of a much
larger group of taxpayers.
-
Japanese industrial policy support of the steel
industrial yielded very low returns on investment
in that sector.
-
For every "successful" government-supported high-
technology industry, there may be various outright
failures that never become publicized.
Improving Labor Quality
Improved labor quality is considered, along with capital
investment and technological innovation, to be the third
major factor underlying increases in productivity.
Higher and improved levels of schooling should lead to
higher worker productivity. The Administration has made
improvements in the nation's educational system a high
priority.
-
The Administration has proposed a record $34.9 billion
in funds for the Education Department and Head Start.
-
The President's AMERICA 2000 education reform strategy
aims at helping communities achieve the National
Education Goals by the year 2000.
-
The Administration has advanced various proposals to
improve the quality of schooling by increasing choices
of schooling available to middle and low income
families.
Through the Job Training 2000 initiative, the Administration
proposed to overhaul the current fragmented, inefficient
Federal job training program.
Increasing the Role of Market Forces
The government can substantially enhance the role of market
forces through reduction of government regulation of the
economy. This will allow competition to determine the
amount of goods and services produced and the prices at
which these are transacted. It also promotes production on
a least-cost basis, and the channelling of investment into
the most productive projects.
As part of an on-going effort to widen the role of market
forces, the Administration reviews government regulations to
ensure they are cost effective and minimize burdens on the
economy.
In January 1992, the President announced a 90-day moratorium
on new regulations (which was later extended an additional
120 days). All government agencies were instructed to
evaluate existing regulations with regard to their
effectiveness and their burden on private sector costs, and
to take actions to reduce these burdens.
-
The estimated annual cost savings from actions
announced during the 90-day period ultimately should
generate savings of $15 to $20 billion.
Market forces can be given greater play by reforming
regulations as well as by eliminating them.
Conclusion
Only if growth-oriented policies are in place will America
retain its competitive position.
However, not only must policies support growth, but they
must be sound -- market oriented -- as well.
U.S. Federal R&D Outlays
(fiscal years, in 1987 dollars)
Billions 87$
70
60
50
40
30
20
10
0
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
Civilian
Defense
Source: National Science Foundation, OMB.
Note: 1992 & 1993 levels are estimates.
Japanese Government R&D Expenditures
(calendar years, in 1987 dollars)
Billions 87$, PPP
10
8
6
4
2
0
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
Civilian
Defense
Source: National Science Foundation.
Table 6-2. THE BUDGET PROPOSES AN INCREASE OF $2.5 BILLION
IN FEDERAL INVESTMENT IN RESEARCH AND DEVELOPMENT
(Dollar amounts in millions)
Budget Authority
Outlays
Dollar
Percent
Dollar
Percent
Department or Agency
1989
1992
1993
Change:
Change:
1989
1992
1993
Change:
Change:
Actual
Enacted
Proposed
1992 to
1992 to
Actual
Enacted
Proposed
1992 to
1992 to
1993
1993
1993
1993
Government-wide totals:
Conduct of R&D:
Basic Research
10,615
13,254
14,322
+1,068
+8%
10,255
12,491
13,405
+914
+7%
Civilian
9,650
12,053
13,086
+1,034
+9%
9,312
11,325
12,142
+817
+7%
Defense
1
965
1,201
1,236
+35
+3%
943
1,166
1,263
+97
+8%
Applied Research and
Development
51,298
57,839
59,302
+1,463
+3%
50,626
53,890
56,253
+2,363
+4%
Civilian
11,620
16,257
17,313
+1,056
+6%
11,030
15,132
15,958
+826
+5%
Defense
1
39,678
41,582
41,988
+406
+1%
39,596
38,758
40,295
+1,538
+4%
Subtotal, Conduct of
R&D
61,913
71,093
73,624
+2,531
+4%
60,881
66,381
69,658
+3,277
+5%
R&D Facilities
2,293
3,498
2,933
-565
-16%
2,054
3,286
3,189
-96
-3%
Total,
Conduct of
R&D and Facili-
ties 2
64,206
74,592
76,557
+1,965
+3%
62,935
69,666
72,847
+3,181
+5%
duct of R&D by Agency:
Defense-military
38,031
40,043
40,509
+466
+1%
37,545
37,175
38,847
+1,672
+4%
Health and Human Serv-
ices
7,894
10,216
10,649
+433
+4%
7,486
9,468
10,199
+731
+8%
Energy
5,362
6,514
6,578
+65
+1%
5,692
6,195
6,219
+23
-
National Aeronautics and
Space Administration
5,303
7,706
8,673
+967
+13%
4,975
7,272
7,710
+438
+6%
National Science Founda-
tion
1,671
1,967
2,375
+408
+21%
1,557
1,840
2,056
+216
+12%
Agriculture
1,050
1,328
1,332
+4
-
1,021
1,245
1,285
+40
+3%
Interior
467
583
552
-31
-5%
478
580
546
-34
-6%
Environmental Protection
Agency
389
496
525
+29
+6%
345
454
495
+41
+9%
Commerce
417
580
614
+34
+6%
363
542
582
+40
+7%
Transportation
313
446
498
+52
+12%
322
410
457
+47
+11%
Agency for International
Development
261
322
325
+3
+1%
379
314
303
-11
-4%
Veterans Affairs
212
230
245
+15
+7%
187
247
262
+14
+6%
Other Agencies 3
542
662
750
+88
+13%
532
639
699
+60
+9%
1 Includes the military-related programs of the Departments of Defense and Energy.
2 Components may not add to totals because of rounding.
3 Includes the Departments of Education, Justice, Housing and Urban Development, Labor, the Treasury, the Nuclear
Regulatory Commission, Tennessee Valley Authority, Smithsonian Institution, and the Corps of Engineers.
FEDERAL R&D FUNDING, 1990-1992
(fiscal years, in millions of dollars)
Government-Wide Totals: All Research and Development (Outlays, Including Defense)
1992
1991
1990
Enacted Proposed Percent Enacted Proposed Percent Enacted Proposed Percent
Basic
12,491
12,414
100.62
11,597
11,886
97.57
10,961
10,878
100.76
Applied
54,052
55,650
97.13
51,839
53,745
96.45
51,124
53,540
95.49
R&D Facilities
3,286
3,264
100.67
2,845
2,738
103.91
2,590
2,315
111.88
Total
69,828
71,329
97.90
66,281
68,370
96.94
64,674
66,732
96.92
Government-Wide Totals: Civilian Research and Development (Outlays)
1992
1991
1990
Enacted Proposed Percent Enacted Proposed Percent Enacted Proposed Percent
Basic
11,325
11,362
99.67
10,623
10,911
97.36
10,016
N/A
Applied
15,132
15,503
97.61
14,045
14,449
97.20
12,321
N/A
R&D
Facilities
3,286
3,264
100.67
2,845
2,738
103.91
2,590
2,315
111.88
Total
29,743
30,129
98.72
27,513
28,098
97.92
24,927
24,752
100.71
Selected R&D Initiatives (Budget Authority)
1992
1991
1990
Enacted Proposed Percent Enacted Proposed Percent Enacted Proposed Percent
Basic Research:
Supercollider
484
534
90.64
243
318
76.42
218
250
87.20
NSF Budget
2,572
2,722
94.49
2,316
2,383
97.19
2,084
2,171
95.99
Applied Research:
HPCC
655
638
102.66
489
469
104.26
Adv. Materials
1,310
1,316
HIV/AIDS
1,210
1,152
NIST R&D
247
248
99.60
215
R&D -- Japanese Government (billions 87$, PPP)
R&D -- Japanese Government (billions $)
Year
Total
Civilian
Defense
GDP
Total
Defense
Civilian
% GDP
1977
5.81
5.69
0.13
656.6
3.511
0.078
3.433
0.52%
1978
6.31
6.17
0.14
738.8
4.053
0.087
3.966
0.54%
1979
6.77
6.63
0.15
849.2
4.753
0.102
4.651
0.55%
1980
7.09
6.93
0.15
960.7
5.39
0.117
5.273
0.55%
1981
6.99
6.82
0.16
1089.3
5.787
0.136
5.651
0.52%
1982
7.06
6.88
0.18
1196.2
6.24
0.158
6.082
0.51%
1983
7.19
6.99
0.20
1270
6.52
0.182
6.338
0.50%
1984
7.31
7.09
0.22
1371.5
6.795
0.204
6.591
0.48%
1985
7.55
7.27
0.28
1478.7
7.209
0.271
6.938
0.47%
1986
7.80
7.48
0.31
1550.1
7.6
0.306
7.294
0.47%
1987
8.46
8.11
0.35
1662.2
8.463
0.354
8.109
0.49%
1988
8.39
8.00
0.39
1823.8
8.692
0.406
8.286
0.45%
1989
8.53
8.09
0.44
1981
9.14
0.466
8.674
0.44%
1990
2178.5
R&D U.S. Federal Government (billions 87$)
R&D U.S. Federal Government (billions $)
Year
Total
Civilian
Defense
GDP
Civilian
% GDP
1977
38.7
19.1
19.6
1919.7
10.569
0.55%
1978
41.2
20.9
20.3
2156.4
12.455
0.58%
1979
40.7
22.0
18.7
2431.9
14.196
0.58%
1980
42.8
22.1
20.7
2644.5
15.592
0.59%
1981
43.9
22.1
21.8
2964.7
17.231
0.58%
1982
41.5
17.8
23.7
3124.9
14.85
0.48%
1983
41.3
15.7
25.6
3317.0
13.602
0.41%
1984
45.1
16.7
28.4
3696.7
15.221
0.41%
1985
50.1
17.9
32.2
3970.9
16.856
0.42%
1986
53.7
17.0
36.7
4219.6
16.485
0.39%
1987
53.3
16.2
37.1
4453.3
16.159
0.36%
1988
54.1
17.4
36.7
4810.0
18.068
0.38%
1989
56.1
18.8
37.3
5170.1
20.394
0.39%
1990
56.6
20.1
36.5
5459.5
22.732
0.42%
1991
56.3
20.7
35.6
5626.6
24.296
0.43%
1992
58.7
22.2
36.5
5865.0
26.824
0.46%
1993
59.7
23.1
36.6
6231.6
28.847
0.46%
U.S. Federal Civilian R&D as Percent of GDP
(fiscal years)
Percent
0.65
0.6
0.55
0.5
0.45
0.4
0.35
0.3
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
Source: National Science Foundation, OMB.
Note: 1992 & 1993 levels are estimates.
U.S. Federal R&D Outlays
(fiscal years, in 1987 dollars)
Billions 87$
70
60
50
40
30
20
10
0
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
Civilian
Defense
Source: National Science Foundation, OMB.
Note: 1992 & 1993 levels are estimates.
Japanese Gov't Civilian R&D as Percent of GDP
(calendar years)
0.56
0.54
0.52
0.5
0.48
0.46
0.44
0.42
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
Source: National Science Foundation, [Haver]
Civilian R&D Expenditures
(in 1987 dollars)
Bilions 87$, PPP
25
20
15
10
5
0
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
United States
Japan
Source: National Science Foundation, OMB, OECD.
Note: 1992 & 1993 levels are estimates. U.S. expenditures are over fiscal year; Japanese are over calendar year.
Japanese Gov't Civilian R&D as Percent of GDP
(calendar years)
0.65
0.6
0.55
0.5
0.45
0.4
0.35
0.3
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
Source: National Science Foundation, OECD.
Japanese Government R&D Expenditures
(calendar years, in 1987 dollars)
Billions 87$, PPP
10
8
6
4
2
0
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
Civilian
Defense
Source: National Science Foundation.
Civilian R&D Expenditures as Percent of GDP
Percent
0.65
0.6
0.55
0.5
0.45
0.4
0.35
0.3
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
United States
Japan
Source: National Science Foundation, OMB, OECD.
Note: 1992 & 1993 levels are estimates. U.S. figures are over fiscal year; Japanese figures are over calendar year.
Members of the Committee on Science, Space & Technology
MAJORITY
MINORITY
George E. Brown, Jr. (CA)
Robert S. Walker (PA)
James H. Scheuer (NY)
F. James Sensenbrenner (WI)
Marilyn Lloyd (TN)
Sherwood L. Boehlert (NY)
Dan Glickman (KS)
Tom Lewis (FL)
Harold Volkmer (MO)
Don Ritter (PA)
Howard Wolpe (MI)
Sid Morrison (WA)
Ralph Hall (TX)
Ron Packard (CA)
Dave McCurdy (OK)
Paul B. Henry (MI)
Norman Mineta (CA)
Harris W. Fawell (IL)
Tim Valentine (NC)
Lamar Smith (TX)
Robert Toricelli (NJ)
Constance Morella (MD)
Rick Boucher (VA)
Dana Rohrabacher (CA)
Terry L. Bruce (IL)
Steven Schiff (NM)
Richard Stallings (ID)
Tom Campbell (CA)
James A. Traficant, Jr. (OH)
John J. Rhodes (AZ)
Henry Nagle (IA)
Joe Barton (TX)
James Hayes (LA)
Dick Zimmer (NJ)
Jerry Costello (IL)
Wayne Gilchrest (MD)
John S. Tanner (TN)
Sam Johnson (TX)
Glen Browder (AL)
George Allen, Jr. (VA)
Pete Geren (TX)
Ray Thornton (AR)
Jim Bacchus (FL)
Tim Roemer (IN)
Robert E. Cramer (AL)
Dick Swett (NH)
Michael Kopetski (OR)
Joan Kelly Horn (MO)
Eliot Engel (NH)
John Olver (MA)
08/05/92
10:05
OMB LRD/ESGG
000
DRAFT
August 5, 1992
(House Rules)
H.R. 5231 - National Competitiveness Act of 1992
(Valentine (D) North Carolina and 43 others)
The Secretary of Commerce, Secretary of State, Administrator of
the Small Business Administration (SBA), Chairman of the Council
of Economic Advisers, and Director of the Office of science and
Technology Policy will recommend a veto of H.R. 5231 unless the
technology financing provisions in Subtitles D and E of Title III
are deleted. These provisions would establish, within the
Department of Commerce, a technology development loan program and
a high technology analogue to SBA's Small Business Investment
Company (SBIC) Program.
The Administration believes these "banking" provisions are
inappropriate for the Commerce Department's Technology
Administration, which does not have the financial expertise
needed to administer such programs. The Administration supports
improvements for the SBIC program, and believes that the Commerce
Department and SBA should more closely cooperate to provide
technical expertise in areas of financial assistance to high
technology companies.
In addition, the Administration opposes provisions of H.R. 5231
that:
- Establish a Council of Technology and Competitiveness
within the Executive Office of the President. Generally, a
*
Federal interagency group does not possess the judgment to
plan the development of future technologies or to decide
which technologies will be the most economically
productive.
- Alter the initial intent of the Manufacturing Technology
Centers program by allowing continued direct support of the
centers beyond six years.
- Establish an unnecessary and undesirable set-aside for
consortia within the Advanced Technology Program.
- Micromanage the National Technical Information Service
(NTIS) by pressuring it to enter into a long term lease
with organizations that may not meet NTIS' long-term needs
in the most effective way.
08/05/92
10:00
UMB LRD/ESGG
004
DRAFT
2
- Authorize funding levels that, given current fiscal
constraints, far exceed the anticipated Administration
request.
- Extend the Baldridge Award by statute to educational
institutions prior to the completion of relevant studies
and discussions with the educational community.
- Require a report on positions in international negotiations
affecting Federal research and development programs which
would infringe on the President's exclusive authority to
conduct the Nation's foreign affairs.
- Duplicate activities of other agencies by requiring a
report on certain agency activities, such as specified
international negotiations and the Small Business
Investment Research program.
******
STATEMENT BY
MICHAEL J. BOSKIN, CHAIRMAN
PRESIDENT'S COUNCIL OF ECONOMIC ADVISERS
Before the
Committee on Science, Space, and Technology
U.S. House of Representatives
August 5, 1992
U.S. Competitiveness
Introduction
Thank you Chairman Brown and Ranking Member Walker, distinguished
members of the Committee, it is a pleasure to be with you today.
Much attention has focused recently upon the economy's short-term
performance and problems, particularly the need to strengthen growth to generate
jobs rapidly enough to bring down unemployment. These matters are enormously
important, and I would be pleased to discuss aspects of them if Members of the
Committee so wish, but I have been asked to focus on long-run U.S.
2
competitiveness. I appreciate the opportunity to discuss these prospects today, and I
commend the Committee for taking this longer-term perspective.
The long-term competitiveness of a nation is best reflected by its standard of
living. Unlike an individual firm or an industry, there is no readily measurable
gauge of competitiveness such as sales growth, market share, or unit cost, let alone
an explicit market valuation of the company. For the nation as a whole, the
aggregation of millions of citizens who are workers, savers, investors, and
consumers, millions of businesses, and numerous industries, the most direct measures
would be the standard of living of the population, its growth over time, and its
comparison to citizens in other countries. From this perspective, there is both good
and bad news. It is not fully appreciated, but American citizens have the highest
standard of living in the world, as traditionally measured by gross domestic product
per capita (GDP) (see chart 1 for a comparison with Japan and Germany). But the
primary foundation of improvements in standards of living are increases in
productivity--output per worker. Again, the United States has the highest level of
productivity in the world (see chart 2 for a comparison with Japan and Germany).
But, productivity growth in the United States has been too sluggish for almost a
quarter century (see chart 3).
America has a strong foundation upon which to build its future, but there are
serious challenges to surmount if we are to remain the world's strongest economy.
3
We have to increase national saving and investment. We have to increase workers'
skills and provide workers with more capital and better technology. We also have
to reduce impediments to the smooth operation of markets. To achieve these goals,
the President has proposed growth-oriented programs in the areas of tax policy,
financial reform, health care, education, and technology. He also has moved
forcefully to reduce the burden of unnecessary government regulation on the
American economy.
Defining Competitiveness In a Dynamic, Evolving Economy
The term "competitiveness" has been used in many different ways by many
different people, some of them embracing a comprehensive vision of the national
interest, others adhering to a more narrow definition of priorities. To some,
international competitiveness is measured by the ability of U.S. firms to compete
successfully with foreign producers either by producing at home and exporting--so-
called "trade competitiveness". or by locating abroad and competing successfully
with foreign firms. However, the competitiveness of the entire economy cannot be
defined in terms of the performance of any narrow set of industries. The goods and
services exported by a country depend upon its comparative advantage--based upon
its resources, labor, and capital and how these are combined to produce goods at the
lowest cost. In any evolving, dynamic economy, changes in supply conditions,
4
world demands, or technology naturally will bring about changes in the competitive
performance of specific industries.
However, it can be very misleading to measure the competitiveness of an
economy by its balance of trade. In conjunction with other developments, a trade
surplus could be either good or bad news; a sign of strength or of weakness.
Strong, prosperous countries, such as the United States in the 1980s or Japan after
the oil shocks of the 1970s, periodically run current account deficits. Conversely,
relatively poor countries such as Romania during the last days of the Ceaucescu
regime, can run large surpluses. But I am certain that no one would want to
emulate the economic policies that created Romania's surplus and eventually the
legacy of poverty that confronts its people today.
Trade flows may, when used in conjunction with a wide array of other
indicators, be useful in evaluating our economic performance. Trade flows are not
sufficient by themselves to characterize the long-term competitiveness of the
American economy, as is obvious from the example of Romania. Hence, it is best
in taking a long-run view to focus on conditions across the economy and over
periods of time, rather than on the situation of particular industries at a given point
in time (although that may well be relevant for other purposes).
5
In fact, American history contains many examples of industries that have gone
through remarkable changes. The cotton industry was once thought of as a
preeminent industry in the United States. Its relative decline caused much concern
and cries for government intervention. However, other industries, such as railways,
steel, and textiles, emerged as leading sectors of the economy.
A more recent example of such change is the evolution of the typewriter
industry in the United States. Typewriters were once indispensable in offices. But
now, with rapid technological improvement, typewriters have been, by and large,
replaced in the United States and in other industrialized nations by cost-competitive
and more productive personal computers. No one would dispute the importance
today of the personal computer sector--in terms of job creation, earnings, and
productivity enhancement--for our overall economic performance.
The replacement of industries in which we no longer have a comparative
advantage by industries in which we now have a strong advantage, as well as the
rise of more technologically advanced sectors to replace previously important
industries represents the natural progress and evolution of a dynamic and flexible
economy. There is no doubt that one day today's personal computers will be
replaced by more advanced equipment. The point is that we should not define the
competitiveness of the U.S. economy exclusively in terms of the performance of
some narrow set of industries.
6
In fact, it is the ability of our economy to respond flexibly to change that has
made it the most competitive in the world today. Contrary to many claims that
have been made in recent years, the American economy is not in decline, and is not
being superseded by other industrial countries. But we cannot take sustained growth
at rates sufficient to maintain American economic leadership for granted. It will
require major changes in the economy and in economic policy.
Current Situation
With less than 5 percent of the world's population, America produces about a
quarter of the world's total GDP. Our GDP per capita was $22,056 in 1990,
placing the United States more than 25 percent above Germany and Japan. The
United States has the highest absolute level of productivity of any country in the
world, with a GDP per employed person of $45,918 in 1990.
The competitive position of the United States actually has improved over the
last decade. In 1991, the United States produced a greater share of the industrial
output of the OECD countries than it did in 1980.
However, America cannot take sustained, solid economic growth for granted.
To maintain our competitive position, we must continue to make progress toward
7
increasing saving and investment, promoting technological innovation, improving our
labor force, and increasing the scope for market forces in the economy.
These policies, if they are sustained, will lead to higher average rates of
growth. When small increments to growth rates are compounded over many years,
they lead to substantial differences in standards of living. It is the sustained
application of appropriate policies that underlies long-term improvements to
competitiveness.
I will now address some of the areas in which competitiveness policies can
make a difference.
Increasing Saving and Investment
Long-term improvements in competitiveness require a continuing stream of
new investment in new capital. Productivity growth and rates of investment are
highly correlated. During 1959-73, capital per worker in the private business sector
grew 2.4 percent annually while productivity grew by 2.8 percent. During 1973-89,
these figures dropped to 0.8 percent and 0.9 percent, respectively. Raising
investment rates will be crucial to raising future productivity growth.
8
High levels of investment, in turn, require high levels of saving. The gross
national saving rate of the U.S. economy has declined from over 16 percent in the
early 1960s to just under 13 percent in 1990. Clearly, raising national saving must
be an important part of the effort to bolster our competitiveness.
One of the keys to ensuring the availability of new capital is sound monetary
and fiscal policy. Low and steady inflation will reduce uncertainty and promote
investment. A successful fiscal policy over the long term would release resources
for private investment and lower the cost of capital. Towards that end, the
President has submitted budgets with a focus on both controlling the growth of
government spending and, within proposed spending categories, shifting from current
consumption to investment.
Tax policies should minimize distortions to incentives to work, save, invest
and innovate. The Administration has proposed the introduction of Family Savings
Accounts and more flexible IRAs as ways to stimulate personal saving for pre-
retirement objectives. To encourage investment, the Administration has proposed a
capital gains incentive that reduces the tax on long-term gains to 15.4 percent, a
new 15 percent Investment Tax Allowance, and simplified and liberalized treatment
of depreciation. The Administration also has proposed the establishment of
Enterprise Zones to bring entrepreneurship and opportunity to distressed areas.
9
Over the long term, a well functioning financial system is essential to ensure
that businesses and consumers that rely on credit have access to financing. The
Administration's proposals to remove archaic legal barriers, correct weaknesses in
deposit insurance, and bolster the FDIC's Bank Insurance Fund were intended to
help create a safer, sounder, and more internationally competitive financial system.
Promoting Technological Innovation
Economic growth can be enhanced by policies supporting the development of
intellectual capital. Research and development can lead to new products and more
efficient production processes that generate employment, productivity growth, and an
improved standard of living.
In many areas of technology, the gains from innovation can be captured by
private entrepreneurs, so that there are sufficient incentives for private R&D. In
these areas, innovation is best pursued by the private sector. This ensures that R&D
effort will be directed toward the most productive, market-worthy projects.
At the generic and "pre-competitive" stage of R&D, the fruits of research may
be hard to capture, and in fact may benefit others who have not contributed to the
cost of the research. In these circumstances, private entrepreneurs would be unlikely
to undertake sufficient R&D, and this is where there is an important role for
10
government-funded activities or special tax provisions to account for this
"externality." This year the Administration proposed a record $76 billion R&D
budget both for basic research and for applied research and development. To
promote private innovation, the Administration consistently has advocated making the
R&D tax credit a permanent part of the tax code. Reducing the tax rate on capital
gains also would improve the incentives for private R&D.
The Administration consistently has highlighted the importance of basic and
applied research activities and the importance of reducing barriers to innovation.
Other Administration initiatives include (1) continuing implementation of the
National Cooperative Research Act (NCRA) of 1984, which enables private
companies to form research alliances without fear of unwarranted antitrust
uncertainty; (2) proposed legislation to expand the NCRA to include joint production
ventures; and (3) redeployment of the National Weapons Laboratories' assets in
favor of broader (non-defense) objectives.
As I noted earlier, when the benefits of R&D can be appropriated by private
researchers, the choice and funding of research projects should be left up to the
market. This will ensure that resources are channeled into the most productive
research opportunities, and this allocation will be policed by the market itself. Even
when the benefits to research are not appropriable by the market, this does not
11
necessarily mean that government should step in. The economic benefits of
government-sponsored research must be weighed against their costs. Hence, the role
for government-sponsored research in our economy must be considered in light of
two standards: appropriability and the balance of costs and benefits.
Improving Labor Quality
Improved labor quality is, along with capital investment and technological
innovation, a third major factor underlying increases in productivity. Higher and
improved levels of schooling will lead to higher worker productivity. The
Administration has made improvements in the nation's educational system a high
priority. It has proposed a record $34.9 billion in funds for the Education
Department and Head Start. The President's AMERICA 2000 education reform
strategy is aimed at helping communities achieve the National Education Goals by
the year 2000. The Administration has advanced various proposals to improve the
quality of schooling by increasing choices of schooling available to middle and low
income families.
Improving labor quality does not stop at the classroom door. Through the
Job Training 2000 initiative, the Administration proposes to overhaul the current
fragmented, inefficient Federal job training programs. This initiative would improve
services to clients, gear training to local needs, ensure quality training and
12
accountability for outcomes, and allocate funding in the form of vouchers to
individuals.
Strengthening the Dynamism and Flexibility of the Private Sector
At the core of the U.S. economy's dynamism and resiliency is the flexibility
it derives from reliance on markets. The operation of the marketplace allows
competition to determine the amount of goods and services produced and the prices
at which these are bought and sold. It also promotes production on a least-cost
basis, and the channelling of investment into the most productive projects.
Government rules and regulations, when applied inappropriately, can
needlessly add to costs, distort the efficient allocation of resources, reduce the
economy's flexibility and disrupt employment. Hence, the performance of the
economy can be substantially enhanced through reform of unnecessary government
economic regulations.
As part of an ongoing effort to widen the role of market forces, the
Administration regularly reviews government regulations to ensure they are cost
effective and to minimize the regulatory burdens on the economy. In January 1992,
the President announced a 90-day moratorium on new regulations that impede
economic growth, which was later extended an additional 120 days. As part of the
13
moratorium, all government agencies were instructed to evaluate existing regulations
with regard to their effectiveness and their effect on private sector costs, and to take
actions to reduce these burdens in a manner consistent with the underlying statutes
and protecting public health and safety.
The economy's performance can be directly improved by reforming
regulations as well as eliminating them. Regulations can be designed to give firms
greater incentives to cut costs and to innovate. For example, in moving to free
competition in long-distance telephone service, the FCC has tied some of AT&T's
rates to an index that is adjusted for inflation minus a correction for expected
improvements in productivity. If AT&T reduces its costs or improves its products,
it is allowed to keep some of the profits.
Conclusion
The American economy continues to be the largest and most productive in the
world. This wealth gives America every opportunity to continue to grow and
prosper in the years ahead. However, this growth cannot be taken for granted.
Only if growth-oriented policies, such as those proposed by the President, are put in
place and implemented on a sustained basis will our living standards continue to rise
while we retain our preeminent position in the global economy.
GDP per capita
Chart 1
1990 U.S. dollars
As of 7/28/92
25,000
21,731
22,056
20,000
18,718
17,571
16,026
16,231
15,425
15,000
13,574
12,342
10,000
5,000
0
1980
1988
1990
United States
Japan
Germany
Note: Purchasing power-parity exchange rates.
Source: Bureau of Labor Statistics.
Productivity
Chart 2
1990 U.S. dollars
50,000
45,918
40,000
36,074
35,040
30,000
20,000
OUENAZY
JARAZ
STATES
10,000
0
1990
Note: Purchasing power-parity exchange rates.
Productivity is defined as GDP per worker.
Source: Bureau of Labor Statistics.
Trends in Productivity
Chart 3
1960-90
1990 U.S. dollars
50,000
40,000
30,000
20,000
10,000
0
60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90
U.S.
Germany
Japan
Note: Purchasing power-parity exchange rates.
Productivity is defined as GDP per worker.
Source: Bureau of Labor Statistics.