Media coverage of the Kansas City Fed’s annual Jackson Hole Economic Symposium has predominantly, if understandably, focused on Fed Chair Jerome Powell’s comments regarding the future path of interest rates. But the Jackson Hole research presentations should prompt serious concern among policymakers across the country.
American competitiveness is top of mind for policymakers on both ends of Pennsylvania Avenue. The Biden administration continues to pressure China through export controls and investment restrictions. Most recently, Commerce Secretary Gina Raimondo, while denying that the United States is trying to de-couple from China, said the country might soon be “uninvestable” for American businesses. In Congress, the House Select Committee on China continues to explore U.S.-China competition and Senate committees started work over the summer on a potential new package of competitiveness bills.
The Jackson Hole papers provide broader, and gloomier, context for all this work. While American leaders are worried now about things like semiconductors, there are slow-moving developments that threaten to undermine U.S. competitiveness over the long-term.
Falling interest in innovation. Over the past decade, venture capital investments into startups skyrocketed, reaching record levels in 2021. This VC boom has often been lauded as heralding a new era of breakthrough innovation. That’s not entirely wrong. Areas like space, biotech, and of course artificial intelligence, there are abundant technological opportunities.
Yet the growth in VC investing was also partly fueled by ultra-low interest rates, which drove investors on a “search for yield.” One of the Jackson Hole papers, authored by Yueran Ma and Kaspar Zimmermann, finds that the end of rock-bottom interest rates could mean less VC investment and, in turn, less innovation. In their analysis, tightening monetary policy leads to a decline in VC investment. It also leads to lower R&D spending by public companies and a fall in patenting, both indicators of innovation.
As Ma and Zimmermann are quick to point out, their analysis is novel, and much work remains to be done to examine the potential effects of monetary policy on innovation. For policymakers seeking to catalyze more private R&D through public incentives and subsidies (such as through the CHIPS and Science Act of 2022), such research suggests their efforts may be complicated by rising interest rates. Additionally, an important paper presented by Charles Jones at the symposium points to a long-run trend indicating that “ideas are getting harder to find.” A combination of Jones’ headwinds and monetary tightening’s effects on innovation may not bode well for overall productivity and growth.
Debt as far as the eye can see—and beyond. As Congress squabbles over the nature of a continuing resolution regarding the federal budget, a paper by Barry Eichengreen and Serkan Arslanalp offers a sober appraisal regarding fiscal policy: “high public debts are here to stay.”
For the United States, the researchers say, such debt is “at least manageable” given strong demand for U.S. treasuries and the dollar’s status as global reserve currency. Yet keeping high levels of debt manageable means “avoiding steps that make a bad situation worse.” Washington consistently displays an inability to abide by that principle.
Periodic debt ceiling dramas play chicken with the U.S. credit rating and do little to, as BPC’s Executive Director of Economic Policy Shai Akabas puts it, “get our fiscal house in order.” Failure to do so affects U.S. competitiveness. While high public debt might be “manageable” in a world of all else being equal, recurring fiscal policy shenanigans and rising demand for government spending (especially because of an aging population) will serve as constraints on policymaker actions and decisions to strengthen competitiveness.
Eichengreen and Arslanalp see high public debts as inevitable: “governments are going to have to live with” previously unthinkable levels of public debt. Yet there is an alternative that could help mitigate the situation: reforms to align the debt limit with the annual budget process and force policymakers to vote on solutions to America’s debt problem. Whether it’s a viable alternative remains to be seen.
Look beneath the surface. A particularly interesting presentation was given by Nela Richardson, looking at the “workforce behind the workforce” (those in the caring professions), highlighted hiring challenges in nursing and teaching. Richardson puts it in fairly stark terms: worker entry into nursing and teaching is not close to keeping up with demand. Unmentioned, but just as critical, is the behavioral health workforce, where critical shortages have persisted.
In his paper, Jones points out that human capital growth has accounted for about one-quarter of annual U.S. economic growth over the last half-century. Yet today, growth in human capital—measured as educational attainment—is “stagnating.” The work of Richardson and Jones highlights the fact that the very bedrock of American competitiveness may be the health and education professions. The U.S. economy needs workers who are appropriately trained and educated—and those workers need to be healthy, both physically and mentally. If we don’t have workers who are able to fulfill those roles, other efforts to strengthen competitiveness, whether through public subsidies or other methods, will falter.
The challenges ahead are significant: Potential declines in innovation due to tightening monetary policy, persistently high public debt that prompts destructive political fights and constrains policy action, and workforce gaps in the caring economy that undermine macroeconomic performance. This is the landscape on which U.S. competitiveness will be shaped and to which policymakers must orient themselves. Our political leaders should be paying attention.
