PART III
Introduction
We study history to better understand the present and to enable us to make better decisions for the future. The first two parts of this book presented a history of the extraordinary evolution of money and credit from the establishment of the Federal Reserve System in 1913 to the present. The final part presents important policy recommendations based on the lessons that can be derived from that history. Most crucially, Part Three shows that the Money Revolution opens up unprecedented opportunities for the United States to radically accelerate economic growth, enhance human well-being and strengthen US national security by investing aggressively in the Industries of the Future.
In recent years, the United States has experienced widespread economic discontent that has resulted in a bitter partisan divide in politics. At the same time, China has emerged as a geopolitical rival that threatens the United States' economic, technological, and military primacy and, therefore, US national security.
If the United States does not act quickly, the political divisions at home could tear the country apart, while Chinese hegemony becomes entrenched throughout the greater part of the world.
Fortunately, the United States has the means to stop and reverse its relative economic decline. The Money Revolution described in the first two parts of this book has created a set of circumstances that will allow the United States to carry out an Investment Revolution.
The objective of Part Three of The Money Revolution is to persuade the American public and US policymakers that the United States can and must make a multitrillion-dollar investment in new industries and technologies over the next 10 years in order to ignite a technological revolution that would turbocharge economic growth, consolidate the country's geopolitical preeminence, and vastly enhance human well-being, not only in the United States, but all around the world.
Part Three explains why the United States' current level of investment is dangerously inadequate. It shows how a multitrillion-dollar investment program could be structured and discusses the industries that should be targeted. It demonstrates how the investment program could be financed and it describes the extraordinary benefits that such a large-scale investment program could be counted on to deliver.
The Money Revolution of the twentieth century means that it is now possible to turn today's dreams for a better world into reality – not generations from now, but in our own lifetime. The financing is available. Only sufficient imagination is lacking. The goal of this book is to overcome that impediment, so that the first American Century need not be the last.
CHAPTER 16
Basic research leads to new knowledge. It provides scientific capital. It creates the fund from which the practical applications of knowledge must be drawn. New products and new processes do not appear full-grown. They are founded on new principles and new conceptions, which in turn are painstakingly developed by research in the purest realms of science.
Vannevar Bush1
The purpose of the final part of this book is to advocate that the United States grasp the opportunity that the Money Revolution has made possible by undertaking a government-financed investment program in twenty-first century industries and technologies on such a large scale that it would be certain to succeed.
This chapter will summarize why such a large-scale investment program is possible and explain why it is urgently necessary. It will also discuss its ideal size, which industries it should target, and how it could be structured. Later chapters will describe how it could be financed and the transformational results it could be counted on to deliver.
Why a Large-Scale Investment Program Is Possible
Before the breakdown of Bretton Woods, there were hard constraints on how much the government could spend and on how much money the Fed could create.
If the government spent too much, as it did during the 1960s and 1970s, it overstimulated the relatively closed US economy and caused inflation. The large increase in government borrowing pushed up interest rates and “crowded out” the private sector. Moreover, increased government stimulus caused dollars to flow overseas as increased consumer demand pulled more imports into the US and as foreign investment by cash-rich US banks and corporations expanded. Large dollar outflows could not be tolerated because, up until August 1971, the governments of other countries had the right to exchange the dollars they accumulated for US gold; and any significant loss of gold would threaten the Fed's ability to continue backing dollars with gold.
At the same time, the Fed's freedom to create money was constrained by the legal requirement that it hold gold certificates to back the money it created and by the likelihood that increased money creation would lead to high rates of inflation.
All these constraints were eliminated after the US stopped backing dollars with gold following the breakdown of the Bretton Woods system and once the US started running large trade deficits with the rest of the world from the early 1980s.
Afterwards, the government found that allowing the trade deficit to widen meant that it could spend much more freely without causing inflation because importing goods from abroad, with no concern for the balance of trade, permitted the United States to circumvent the domestic bottlenecks in the labor market and in industrial capacity that had always led to inflation in the past. At the same time, the Fed was no longer required to back dollars with gold certificates and was therefore free to create as many dollars as it wished, so long as the increase in the money supply did not cause inflation, which it no longer did because the surge in imports from low-wage countries drove prices down.
As a result of these changes, the policy options available to the government and the Fed changed radically. During the 1960s and 1970s too much government spending and too much money creation led to double-digit inflation in the United States. After the United States began running large trade deficits in the early 1980s and as globalization gained momentum, inflation rates fell and then remained low regardless of how large the government's budget deficits became or how much money the Fed created. This was spelled out in considerable detail in Chapter 15.
These developments mean that we are living in a completely new policy environment. In the old world of gold-backed money and balanced trade, large budget deficits and excessive money creation did more harm than good. That is no longer the case. In the world in which we live, large-scale government investment in new industries and technologies financed by large-scale money creation has the potential to deliver a technological revolution that would not only generate much higher rates of economic growth, but also solve many of the world's most intractable problems and radically improve the well-being of everyone alive – all without creating high rates of inflation.
Why a Large-Scale Investment Program Is Necessary
There are three main reasons the US government must invest on a very much larger scale than it does at present.
The first and most compelling reason is that it must because it can. A multitrillion-dollar investment program is certain to produce technological breakthroughs that will improve the lives of every American – and everyone else as well. It is now possible for the US government to invest trillions of dollars in new industries and technologies at little to no cost, as Chapters 19 and 20 will demonstrate. Consequently, the cost-reward trade-off is overwhelmingly favorable. The cost is very close to zero. The rewards include a vast improvement in health and well-being, as well as greatly enhanced national security. It would be extraordinarily foolish for the US government not to fully exploit the opportunities open to it at this unique moment in history.
Second, our economic system is driven by credit growth. Capitalism has evolved into Creditism, as explained in Chapter 11. The crisis of 2008 occurred because the private sector was unable to take on any more debt. A surge in US government borrowing and spending prevented a collapse into a new Great Depression. The government is going to have to continue to borrow and spend to make total credit grow and to make the economy expand. It would be far wiser for the government to borrow to fund a large-scale investment program, rather than to borrow to finance unnecessary wars or excessive consumption.
Finally, as Chapters 17 and 18 will show, China is on the brink of overtaking the United States as the world's leading economic and technological superpower because it invests much more than the United States does, not only as a percentage of GDP, but in absolute amounts. If China surpasses the United States technologically, it won't be long before it becomes the world's dominate military power as well. “When China Rules the World”2 it may be a benign ruler, overseeing a long era of peace and prosperity. On the other hand, it may not be. World history teaches that countries with great technological superiority rarely treat inferior powers kindly.
An artificial intelligence arms race has begun. Within 20 years AI is likely to reach parity with human intelligence. After that it will accelerate at an exponential rate. The country that gets there first will have the rest of the world at its mercy. The US government must ensure that the United States is that country. Pax Americana3 has not been flawless. However, it has overseen a 75-year period of general peace and facilitated an extraordinary expansion of prosperity around the world.
The rationale for the US government to undertake a multi-trillion-dollar investment program would be irresistibly compelling even if no strategic rival to the United States were visible on the horizon. The fact that China is certain to overwhelm the United States technologically, economically, and militarily before the middle of this century if current trends continue makes such an investment program urgently necessary for reasons of national security as well.
How Much to Invest?
The US government should invest as much as possible, as quickly as possible. Chapters 19 and 20 show that the United States could easily finance a $10 trillion investment program over 10 years. But would that much investment over a decade cause the economy to overheat and lead to unacceptably high rates of inflation? If so, then the investment program could be slowed down until the capacity bottlenecks that caused the inflation were overcome. All capacity constraints are temporary. With sufficient investment they can be quickly resolved.
We might discover that the US economy could absorb that level of investment over 10 years without any significant stress. In that case, then more than $10 trillion should be invested.
The correct approach is for the government to set ambitious goals and to invest as much as possible and as quickly as possible to achieve them. There is no doubt that the government could invest multiples of what it is investing now. Chapter 21 describes the extraordinary benefits that could be expected if it does.
Which Industries to Target
The industries and technologies to target for increased investment should be decided after wide-ranging consultation with scientists in the public sector (including those from DARPA, the National Science Foundation, NASA, and the Departments of Health and Human Services, Energy, and Defense), as well as with business leaders and scientists in the private sector (including those from the leading US tech and pharmaceutical giants).
Artificial intelligence, quantum computing, genetic engineering, biotech, nanotech, renewable energy, neural sciences, and robotics stand out as likely candidates.
How to Structure the Investments
There are two ways the federal government could organize such a large-scale investment program.
First, some projects could be carried out entirely by the federal government, just as NASA was during the 1960s. That method succeeded then. NASA sent a man to the moon in less than a decade. Today, there is much talk of the private sector tech giants investing in “moon shot” projects that they expect to produce extraordinary returns in the future. The original “moon shot” was accomplished by the federal government – 50 YEARS AGO. There is no reason that fully government directed projects could not be successful again now.
Alternatively, the federal government could use a venture capital model to drive this program. The government could set up joint venture companies with thousands of the most promising scientists and entrepreneurs in the United States. The government could then fund those companies lavishly in exchange for a 60% equity stake. The scientists and entrepreneurs would own 40% of the equity and they would manage the companies.
Over time, many of those companies would make extraordinary technological breakthroughs and produce life-changing products that would make their shares incredibly valuable. As they do, they could be listed on NASDAQ, with the government (i.e., the American taxpayer) receiving 60% of the payout. Not only would the government eventually fully recover the investment it made in those companies, the profits and the capital gains might very well be high enough to pay off the entire national debt, or to abolish the income tax or both. This is no pipe dream. If one of these extraordinarily well-funded companies were to discover a cure for cancer or Alzheimer's Disease, which, with enough funding it almost certainly eventually would, it could well become the most valuable company in the world when listed on NASDAQ.
The government should adopt both these approaches: fully government-controlled investment projects and government funded joint ventures with the private sector. A government agency beat the private sector to the moon. Let the government sector and the private sector compete to see which will be the first to cure all the diseases, perfect quantum computing, and master artificial intelligence.
Government Sharing in the Profits
In recent decades, government investment in research and development has produced extraordinary breakthroughs that the private sector adopted and derived enormous profits from. For instance, as Mariana Mazzucato documents so brilliantly in her book, The Entrepreneurial State,4 most of the technologies that make smartphones smart resulted from federally funded research programs – technologies such as semiconductors, GPS, touch screen technology, the voice recognition utilized by Siri and Alexa and, of course, the internet itself.
Similarly, federal government-funded research contributed to the creation of the algorithm that Google used to make its search engine the world's best. Google Search now has 93% global market share and Google's parent company, Alphabet, is one of the most valuable companies in the world.
Up until now, however, the federal government has not received a fair share of the profits that have been derived from the research it funds. The share of taxes paid by corporations has continued to shrink thanks to the success of the corporate lobbyists they pay in Washington. In 2018, corporate taxes amounted to only 1% of GDP, whereas the average from 1934 has been 2.6%.
Going forward, a structure will have to be put in place that ensures the federal government will earn income from licensing fees when the privates sector adopts and profits from the technologies that government investment brings forth. That would greatly reduce the cost of this investment program and finance additional investment in the decades that follow.
Conclusion
The next two chapters describe how and how much the United States invests currently. They also show why the current level of investment is sorely inadequate. Subsequent chapters show how the dangerous deficiencies in US investment can be remedied and detail the extraordinary benefits that will result once they are.
Notes
1. Vannevar Bush in Science, the Endless Frontier, A Report to the President, Director of the Office of Scientific Research and Development, July 1945.
2. See the book by Martin Jacques (2012), When China Rules the World: The Rise of the Middle Kingdom and the End of the Western World. Penguin, UK.
3. Pax Americana is the term given to the period of relative international peace resulting from the preponderance of US military and economic power, c.1945 to the present day.
4. Mariana Mazzucato, The Entrepreneurial State: Debunking Public vs. Private Sector Myths, revised edition. Public Affairs (October 27, 2015).