Bureau of Business and Economic Research
2006 Economic Outlook Seminar
"Montana's Legal Environment: Are We Open For Business?"
February 2, 2006
I'm very pleased to be here today and to take part in what is a very important discussion.
I'm an astrophysicist by training and the director of a federal research agency, so I'm not going to pretend to know much about Montana business law.
Instead, I'd like to place this morning's discussion in a much broader context - the economic security of our nation, and how we can maintain and increase our competitiveness in world markets.
This morning's underlying theme is that a state's laws and regulations help create a particular environment for business, favorable or unfavorable, depending on the particulars.
But the legal environment for business is just one factor -in the economic ecosystem that determines the ability of a company to compete.
Like any ecosystem, it's important to get all the factors right.
To date, we've done a pretty good job, as Paul Polzin and others have pointed out. The U.S. economy is the envy of the world.
Unemployment continues to fall.
GDP growth was 3.5 percent for last year - growing faster than other major industrialized countries..
U.S. productivity continues to rise.
And as the President noted in Tuesday's State of the Union, "In the last two and a half years, America has created 4.6 million new jobs - more than Japan and the European Union combined."
In fact, the performance of the U.S. economy has been so good that it's confounded some of our gloomier critics. But there is a good reason why we have done so well. The United States is a very good competitor.
The best, in fact, according to Michael Porter and his colleagues at Harvard, who have developed a Business Competitiveness Index that ranks the U.S. as the most competitive country out of 116 evaluated last year1.
If you are not familiar with it, the index aggregates a host of economic factors related to the performance of both the public and private sectors to arrive at a nation's overall "competitiveness."
Lest you think the index is prejudiced by large economies, number two is Finland.
Our goal is to stay number one.
But the economic ecosystem is changing, and like any other ecosystem the rule is simple. Adapt or go under.
Change is the one thing we can count on. What was good enough yesterday won't be good enough tomorrow. Countries have two basic options.
They can try to resist change. They can select particular domestic industries that they see as vital and defend their market share through protectionist measures such as trade barriers or government subsidies. But as the President stated, "All these are forms of economic retreat, and they lead in the same direction - toward a stagnant and second-rate economy."
You can look around the globe and see some of the results of pursuing this approach, and it's not pretty.
Or a country can embrace change.
They can strive for competitiveness by working to open up and level the global playing field, by strengthening their business environment, and by increasing their capacity to innovate. "With a level playing field, no one can out-produce or out-compete the American worker."
Commerce Secretary Carlos Gutierrez put this very well last week at the World Economic Forum: "We often talk about how, with world markets opening up, we've gained three billion new consumers - but we've also gained three billion new competitors.
"We believe that the way to deal with that is to open our markets and compete, and that competition is a tremendous spark for innovation. When companies have to compete, they get better. They become more productive, they innovate faster. We have not seen ... a country that has increased its level of innovation by becoming more protectionist."
Both government and industry have roles to play in ensuring our future competitiveness. But government can only play a supporting role - governments don't compete, businesses do.
The President stated this clearly when he said, "The role of government is not to create wealth. The role of our government is to create an environment in which the entrepreneur can flourish, in which minds can expand, in which technologies can reach new frontiers."
In his State of the Union address Tuesday, President Bush proposed the American Competitiveness Initiative that directly addresses some of the most important ways that government can help to ensure that the U.S. environment for business remains the best in the world - including support for research, education and our workforce. These programs are forward-looking and designed to ensure we lead the world in opportunity and innovation for decades to come.
The President's initiative will:
- Boost Federal R&D spending to $137 billion next year - up more then 50 percent over the figure for 2001. The total US R&D spending (government plus industry) will be over $300 billion - greater than the rest of the G-8 countries combined.
- It will make permanent the industry R&D tax credit - something we have sought for years - and update and expand it.
- It will re-emphasize our commitment to education through programs to increase advanced study programs, increase the number of science and math teachers, and extend workforce training programs.
And it will
- Reform our immigration policies to attract and retain the best and brightest high-skilled workers from around the world.
The President called for doubling the budgets of the National Science Foundation, the Department of Energy's Office of Science, and the National Institute of Standards and Technology over the next ten years - and I'd just like to say that we at NIST appreciate the vote of confidence.
That's a broad and ambitious program. But it's only part of the answer, the part that's appropriate for government. Because as I said before, the government only helps create the environment. Companies and entrepreneurs create wealth.
And increasing wealth, more and more, is tied to increasing productivity.
So where do productivity increases come from? They come through continuing improvement in the efficiency and distinction of its products, its services, and its processes - that is, through innovation.
Innovation is our ace in the hole.
Innovation has long been a hallmark of our nation. "Yankee ingenuity" has been a by-word since the beginning of the Industrial Revolution - and with good reason.
Today, the United States has only five percent of the world's population, but it employs a third of the world's scientists and engineers.
Technological innovation, in fact, has accounted for most of our productivity growth, and thus our competitiveness.
It's important to recognize that a firm can innovate as much in the application of technology - improving its processes or organization - as in developing a new technology.
WalMart did not invent computers, but its innovations in inventory control and distribution are revolutionizing the U.S. retail sector.
Indeed, much of the acceleration in productivity can be traced to managerial and technological innovations that improved the basic operations of companies2.
Innovation is key. Radical innovation - the kind sparked by scientific and technological research and development - buys you more than incremental changes.
Bottom line, as the President has said, "... we live in a competitive world ... We shouldn't take our preeminence as the world's greatest economy for granted. We've constantly got to make sure the economic environment here is strong. We've got to make sure that we're innovative."3
Technological innovation is a particularly important theme for me, because it's essentially the core mission of my home - the National Institute of Standards and Technology, an agency of the U.S. Department of Commerce.
We are the nation's oldest federal physical science lab, and if you're not familiar with us, you should be.
Our mission is to promote U.S. innovation and industrial competitiveness by advancing measurement science, standards, and technology in ways that enhance economic security and improve our quality of life.
We're proud of the role we play in supporting U.S. innovation, but we know our limits. Our field is the technological infrastructure - but as a nation we need to innovate at all levels.
The President has laid out a bold competitiveness agenda for the federal government that supports research, education and the workforce. He laid out a vision that can influence the direction of our country for many years to come.
The American Competitiveness Initiative will keep us on top of our game. A British journalist wrote just last week: "For the U.S., the lesson of the past decade is that it should avoid complacency: no one predicted its surge in productivity and it has taken almost a decade to believe in, and then to explain it. If Europe were to rediscover its competitive spirit and close the gap, it could disappear as quickly as it came."
Well, maybe yes and maybe no. We're pretty good at this game of competition.
And with the President's initiative - we as a nation are definitely open for business and will be ready to compete for decades.