Congress' Investment in American Industry is Missing an Ingredient | Opinion

Congress has recently passed several technology funding packages for a variety of constituencies, from STEM education in rural areas to caregiver grants. The U.S. Innovation and Competition Act, which passed the Senate in June, and the America Competes Act just passed by the House have some good things in them, to be sure, but lack essential elements for success.

The Innovation and Competition Act's $52 billion subsidy for onshore chip fabrication is long overdue. But trickling out subsidies through dozens of federal bureaucracies, as the House and Senate bills propose, won't by themselves revive American high-tech manufacturing, productivity and military dominance.

What's missing is the "D" in R&D. Without a revival of the product development that links high-tech manufacturing with results-oriented research, American research will only promote industry in Asia, where public policy supports capital-intensive investment. Federal research funding has remained around 0.4 percent of GDP for the past 60 years. But funding for development—turning theory into saleable products and effective weapons—fell to just 0.3 percent of GDP in 2020 from a peak of 1.5 percent of GDP in the 1960s.

Research isn't enough. Three distinct stages need to occur for technologies to go from a twinkle in a scientist's eye to product launch.

First, basic research discovers new ways of manipulating matter and energy. Integrated circuits, the building blocks for all electronic systems, require interconnected layers of insulating and conducting materials barely thicker than an atom. It took years of research to invent these materials, much of it conducted at national or academic laboratories with funding from the Defense Department or the National Science Foundation.

That's just the research phase. Turning these discoveries into scalable production requires development, in the form of large laboratories. From the 1950s to the 1980s, when America invented the Digital Age, corporate laboratories at the Bell System, RCA, GE, IBM and others led the development of new technologies.

Nancy Pelosi
WASHINGTON, DC - FEBRUARY 4: Speaker of the House Nancy Pelosi speaks about the COMPETES Act at the U.S. Capitol on February 4, 2022 in Washington, DC. The multibillion-dollar bill is aimed at increasing American competitiveness with China and increasing U.S. semiconductor manufacturing. Drew Angerer/Getty Images

Because the great corporate laboratories—sadly abandoned during the 1990s—worked with the world's most advanced manufacturing plants, new inventions could move rapidly from the development stage to the third stage: mass production. Scientists and engineers tested their ideas with production managers and quickly worked out design problems.

Scientific discoveries turned into products with remarkable speed. In the 1970s, to cite one among dozens of examples, RCA took a discovery in semiconductor materials and used it to invent CMOS manufacturing of fast, compact and energy-efficient integrated circuits. By 1978, CMOS chips were being used in American F-15s. LED and plasma displays, semiconductor lasers, fiber optic networks and the internet itself all were products of the three-stage collaboration between researchers, development laboratories and high-tech manufacturers. Federal subsidies supported basic research; private capital took the risk of commercialization. That kind of public-private partnership has a proven track record of success.

All three stages of the research-to-production pipeline require support. Federal R&D funding through corporate as well as national laboratories produced world-beating results from the 1950s through the 1980s because the Department of Defense set priorities for high-tech space and weapons development.

National security offers more than sufficient reason on its own for R&D investment. But the exigencies of war also tend to push R&D towards the frontiers of physics, and set high goals for innovation. There's a big difference between R&D for missile defense, and R&D to invent a crunchier corn flake. Scattershot funding through a maze of federal bureaucracies vitiates the impact of federal spending.

Rebuilding American manufacturing is a trillion-dollar proposition, and federal dollars should be focused on key national priorities. In special cases, such as semiconductors, government subsidies are warranted on grounds of national security as well as economic stability. But the vast majority of the capital needed to restore high-tech manufacturing and the R&D efforts that support it must come from the private sector. Our tax and regulatory framework favors "capital-light" software firms. It should also reward capital-intensive manufacturing.

Human capital for manufacturing has eroded along with physical plants. Manufacturers report an endemic shortage of skilled labor. But other countries, such as Germany, Sweden and Switzerland, have found ways to build skills through apprentice programs that we should emulate. Millions of young Americans would be better off with well-compensated technical skills than with a low-value bachelor's degree and a lot of student debt.

American industry was the wonder of the world in the 1980s. It can be again, if we return to the policies that fostered our success.

Henry Kressel is a technologist, inventor and private equity investor. David P. Goldman, Deputy Editor of the Asia Times, formerly headed research groups at Wall Street firms.

The views expressed in this article are the writer's own.