The book is uneven. Some chapters offer provocative ideas that got me thinking in new ways but did not necessarily persuade me. Some chapters, especially the one on immigration policy, are excellent. The chapter on energy policy is weak on economic analysis and proposes new regulations, one of which could, ironically, make the United States even more susceptible to the international oil cartel, OPEC.
Promoting research | The authors' central proposition "on which all of [their] arguments rest" is this: "[F]aster economy-wide growth over the long run rests on the formation and growth of high-growth companies." They define a high-growth company as a start-up whose revenues eventually mature into $1 billion a year. They use some basic arithmetic to show that if an additional 60 such companies started in the United States in a year, the economy's growth rate that year would rise by 1 percentage point. Their calculation is based crucially on a datum from Yale economist William Nordhaus, who found that the innovative entrepreneurs "capture only 4 percent of the total social gains from their innovations." This estimate seems reasonable.
With this 60-additional-firm goal as their starting point, Litan and Schramm spend most of the rest of the book considering how to get there. That leads them to discuss research and development policy, how universities could reform their incentives for research, tax policy, immigration policy, and energy policy, among others.
On R&D policy, the authors argue persuasively against more federal government funding of research. They claim that the peer review system for awarding funds creates and cements "a club of well-connected senior researchers" who resist novel thinking. As evidence, they note that the average age at which U.S. Nobel Prize winners made their Nobel-worthy discoveries is 34, but that "the average age of the primary investigators who have been awarded research grants by the National Institutes of Health is over 50, and has been steadily rising." The authors emphasize that they do not advocate a rollback of existing levels of research support. It sounds, therefore, as if they're claiming that the existing level is optimal, but they never say why.
The authors advocate a permanent 8 percent R&D tax credit to replace the current temporary 25 percent tax credit that applies to R&D spending over a particular baseline specified by Congress. They would apply the tax credit to "only those activities aimed at exceeding, expanding, or refining commonly held knowledge." They don't explain, though, how that would be enforced when the incentive would be to claim as much as possible in that category. They also favor ending the corporate income tax in order to end the double taxation of corporate income (once as corporate income and again as paid-out dividends), but they stop short of advocating it.
Litan and Schramm are rightly skeptical about government attempts to support business "incubators" and "clusters." They note that the main examples of companies that succeeded—Microsoft, Apple, Dell, Amazon, etc.—did not do so because of a government plan. They point out that many of the entrepreneurial movers and shakers in high-tech clusters don't know or regularly interact with each other, but surprisingly they advocate that local mayors get such people together so that they can interact. If they succeeded without knowing each other, why do the authors think that a government official needs to get them to know each other?
Possibly their most insightful chapter is on the important role of universities in research. One striking fact is that in 1975, private firms accounted for over 70 percent of what R&D magazine called the top 100 "most technologically significant new products" and that the university share was only 15 percent. By 2006, the university share was 70 percent and the private-firm share was down to 25 percent.
The authors have clearly thought a lot about how to leverage academics' contributions more effectively. They make a number of suggestions for changes in the contracts between universities and academics so that academics can be freer to push their ideas into the private sector, and universities can still get their cut. This is not exactly a government policy issue because these are contractual matters between often-private universities and their faculties. In one section of this chapter, though, Litan and Schramm seem to forget their own earlier reference to Nordhaus's finding that innovators get a small fraction of the social gains that their innovations create. The authors present a table showing that for the top 10 universities, licensing income gave a rate of return on research expenditures ranging from a low of 0.3 percent for the University of California system to a high of 4.3 percent for New York University. They call these returns "abysmally low." But if these are the private returns, then aren't the social returns an order of magnitude higher?
Attracting immigrant entrepreneurs | In their chapter on immigration policy, titled "Importing Entrepreneurs," Litan and Schramm point out that between 1995 and 2005, immigrants started or co-founded about one-quarter of "successful firms engaged in technology and engineering," even though immigrants make up only one-eighth of the population. Not surprisingly, therefore, they want to make it easier for entrepreneurial foreigners to immigrate to the United States and stay. On the way to their policy recommendations, the authors give a nice, terse history of U.S. immigration policy. As a U.S. immigrant who had a tough tangle with the Immigration and Naturalization "Service," I thought I understood the ins and outs of immigration law. But the law has changed since I became a permanent resident in 1977, and almost entirely for the worse. The authors note that the number of H-1B visas—visas granted for only six years to high-skilled workers—that Congress allows has fallen from 195,000 a year in 2001–2003 to only 65,000 a year today. Also, to get an EB-5 visa, which is for "immigrant investors," one typically must invest at least $1 million in a business. When I immigrated in 1977, the number was $10,000.
The authors highlight a 2011 proposal by former senators John Kerry and Richard Lugar for a new EB-6 visa for immigrants who want to start a business. Had the law passed, the visas would have been granted to those who invested a minimum amount—well under $1 million—in a business, to those on H-1B visas, or to those who graduated with a science, technology, education, or mathematics degree and met minimum income ($30,000) or asset ($60,000) thresholds. This would have been a major improvement over current law. People who qualified could have gotten permanent-resident status if they had generated three to five jobs for nonfamily members within two years. Litan and Schramm argue that, with these criteria, there should be no quota on the amounts of these visas issued because immigrants who meet the standards would be creating jobs, not reducing them.
Errors on energy | Litan and Schramm's weakest chapter is on energy. One problem is that their history of the energy industry is weak. They claim that John D. Rockefeller's Standard Oil Company engaged in "price-fixing schemes and other anticompetitive practices." In fact, the way Standard Oil was able to capture "upwards of 85 percent" of the oil market was by cutting prices, not raising them. And while they are correct that the Japanese government's "quest for oil security led Japan on an expansionist drive throughout the Pacific that ultimately led to its attack on Pearl Harbor," they leave out the fact that President Franklin D. Roosevelt had tried to cut off Japan's oil supply. While that doesn't make their history wrong, it does make it incomplete and misleading. Also, whereas they correctly date the formation of OPEC to 1960, they don't mention that OPEC's formation was an unintended consequence of President Dwight Eisenhower's discrimination against the Middle East in his assigning of oil import quotas.
Also, the authors don't seem to understand the nature of the world oil market. They write that the "United States is importing oil and will continue to do so, mostly from countries that are autocratically ruled, unfriendly to the United States, or at best, unreliable allies." They see this as a problem. Put aside the fact that between 2006 and 2011, imports from Canada, whose residents are not that unfriendly, grew from 17 percent to 24 percent of total imports. More important, wherever our imports come from, people sell us oil not because they like us, but because they want to make money. We don't really need to worry much about which tyrant controls Iraq, Iran, or Saudi Arabia—they all want to make money. And notice, by the way, that the U.S. and European governments, not the Iranian government, are the ones that restrict oil imports from Iran.
Finally, the authors claim that the U.S. oil industry receives $40 billion in subsidies a year. They footnote an article that they claim makes that case, but I did not find that estimate in the article. It's true that in earlier times the U.S. oil industry was heavily subsidized—if one defines an oil depletion allowance as a subsidy—but most of that special tax treatment is long gone, as the article they cite points out. Their estimate is an order of magnitude too high.
In addition to their weak historical and economic analyses, Litan and Schramm offer some questionable policy proposals for energy. Specifically, they advocate an oil price floor of $60 to $70 per barrel. To maintain that floor, they would have a variable tax on oil, both imported and domestic, equal to the difference between the price and the floor. So, for example, if the floor were $60 and the world price of oil were $50, the tax would be $10. The main advantage they see of such a proposal is that it would protect the investments of "developers and manufacturers of alternative liquid fuels." Their fear seems to be that in the absence of a floor, OPEC would occasionally reduce the price to below $60 per barrel in order to discourage competition.
In two articles in Energy Journal in the late 1980s, I showed the perverse effects of a related proposal—an import fee on oil that varies inversely with the price of oil. Their proposal has the same problem: the fee would make the U.S. elasticity of demand artificially lower. If, therefore, OPEC does have monopoly power—as most energy economists believe—such a variable tax would increase OPEC's monopoly power.
Conclusion | With the exception of this one weak chapter, the rest of Litan and Schramm's book is quite good. If their book persuades the U.S. government to allow even 20,000 more permanent immigrants into the United States every year, it will have been well worth writing.
