American Spending Spree—Echoes from the Past and Lessons for the Future

Kris Bledowski

Manufacturers Alliance for Productivity and Innovation

Kris Bledowski is Council Director and Senior Economist at the Manufacturers Alliance for Productivity and Innovation (MAPI).

Negotiations are ongoing in Congress on the American Jobs Plan and the U.S. Innovation and Competition Act. The former is a $2 trillion infrastructure spending bill originally proposed in March by the White House and recently scaled down by a bipartisan agreement in Congress to a $715 billion INVEST in America Act. The latter calls for $250 billion to be spent on innovation research and in support of the semiconductor industry. It is an enlarged version of an earlier “Endless Frontier Act” promulgated by the U.S. Senate.

Nothing concentrates minds like adversaries who seem to be gaining an edge in frontier technologies. This was the case in the 1960s after the “Sputnik moment” had sunk in. What followed was a flurry of programs to fund scientific research. Many now reckon that another such watershed moment has arrived.

The two proposals mentioned above have China clearly on the brains of lawmakers. The United States needs better infrastructure to grow faster, and it needs sharper science to innovate smarter. For both ends—the thinking goes—serious public money is needed.

Public funding for basic science and generic R&D has merit because the private sector will underinvest in public goods, of which both are examples. Also, outlays for public R&D as a share of GDP have been declining since the 1960s. And many economists agree that the country needs better infrastructure. If there is a quip with the bills, it’s not their intent but their size. Both offer outsize envelopes, and the Jobs Plan is unprecedented in scope.

The United States needs upgrades, and the revised five-year infrastructure bill will more than meet the country’s current needs.

The condition of bridges, viaducts, airports, roads, and utilities has improved significantly over the past 20 years. Research shows that the so-called investment gap only exists in roads and ports, and even those are in reasonable shape. The United States needs upgrades, and the revised five-year infrastructure bill will more than meet the country’s current needs.

The USICA includes $50 billion for immediate funding of U.S. businesses that make certain types of computer chips. Some of them are used in military devices and space exploration and are currently sourced from China. Yet, even if the strategic consideration offers a valid concern, picking winners has rarely brought desired results. There is the danger that such targeted funding will waste taxpayer’s money. By contrast, channeling $100 billion spread over five years into a new technology directorate at the National Science Foundation, offers a greater promise of success, even if the amount is staggering.

Some argue that the two plans resemble the New Deal—a series of bills passed in the 1930s. Franklin D. Roosevelt, then the newly elected president, had initiated spending programs to counter a cyclical downturn. Along the way, he also overhauled financial regulation and enacted a social safety net. But the “American System” is a better historical reference to today’s plans than the New Deal.

The American System was the economic support program of the early 19th century. A series of laws proposed by Congressman Henry Clay during the presidency of James Madison in 1815-1816 rested on three pillars. The first was higher tariffs meant to protect the nascent industrial sector. The second was support for the single currency through capitalization of a new central bank, The Second Bank of the United States. Finally, the third pillar encompassed a slew of subsidies in support of new roads, canals, and agriculture—the latter being the most consequential sector of the economy at the time.

The war of 1812 with England had made the young country’s politicians acutely aware of how vulnerable their position was in relation to the then strongest power in the world. The American System was a response to the economic weakness of its time. Looking to the future, America’s political class sees today’s China in the same light its predecessors saw England two centuries before: a rising global hegemon.

What are the implications for Europe and the transatlantic relations of all this?

To meet the China challenge, America must put its house in order, including upping its research capacity. The same applies to Europe.

If China succeeds in mastering the technologies of the future while the United States and Europe fall behind, then the security of both will suffer. This is the gist of America’s hardline policies toward China, its predatory business rules, and mercantilist investment and trade policies. The United States is following here the advice of Jean-Jacques Servan-Schreiber, who formulated it in the 1960s in The American Challenge. To meet the China challenge, America must put its house in order, including upping its research capacity. The same applies to Europe.

Europe is a valuable U.S. ally because of its economic and innovation heft, among other things. Much physical and intellectual capital flows across the Atlantic in both directions, enhancing welfare of the two sides. The United States views China in geoeconomic terms because any country’s military and political hegemony ultimately springs from its economic strength.

By contrast, an economically withering ally that looks to the past and fears for its future will lose America’s interest. Policymakers on this side of the Atlantic are willing to put such enormous amounts of public money where their mouth is because they don’t want America to feel vulnerable as it was in 1812. This also means the United States is willing to sacrifice short-term commercial gains to check China’s rise. Call it penny foolish and pound wise.