Bill Kerr: With their new book, Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream, MIT economists Jonathan Gruber and Simon Johnson assert that innovation is the key to stimulating America’s economy and reversing growing inequality. They hearken back to the scientific, technical, and economic juggernaut assembled during the Second World War to make the case for vast public investment in research hubs spread across the country.

Welcome to the Managing the Future of Work podcast from Harvard Business School. I’m your host, Bill Kerr. Today I’m joined by Professors Gruber and Johnson, who will sell us on their proposal to solve America’s problems with economic growth and equity. They detail a sweeping vision, from research and development and infrastructure investment to the creation of a new federal commission and a universal income. They argue for systematic change, with the government playing a role that surpasses even the Manhattan Project or G.I. Bill to support innovation in over 100 cities dotting the country. Welcome, guys.

Jonathan Gruber: Good to be here.

Kerr: What prompted you guys to write Jump-Starting America?

Gruber: Well, I think what prompted us was the realization after the 2016 election that neither party really had a strong pro-growth platform; that, if we’re really going to solve a lot of the problems that face our economy and our population, we need to grow, but we need to grow in an inclusive way, in a way that lifts all boats, not just the yachts. And we realized that economics teaches us that the key to growth is productivity, and the key to productivity is research and development. And we looked at the literature, which showed that there’s an enormous returns to research and development, but also the private sector won’t do as much as they should, and the government role was needed.

Kerr: Okay. When you say that no party was pro-growth, did they think that they are pro-growth but the policies were ineffective or ...

Gruber: I’m sure they would say they are pro-growth, but the empirical evidence was that the policies they’re pursuing would not fundamentally increase the growth rate in America nearly as much as investment in research and development would.

Kerr: Okay. So give us the case for why innovation, why research and development?

Simon Johnson: Well, the rate of return on innovation—research and development—is very high, Bill, as you know. There are high private rates of return, maybe about 20 percent, but there are also plenty of risks. There’s very high social rates of return, because the R&D basic science generates a lot of spillovers. No individual company can necessarily know they’re going to be able to grab the returns, but they spread throughout society, and they create lots of potential follow-on investments. And this is what we found out actually in the 1940s and ’50s; this is what we did a lot of in the ’50s and ’60s. We still do some of it, but we used to spend 2 percent of GDP on public support for R&D in America. Now it’s down to less than 0.7 percent of GDP. So we still have some pieces, but we’ve lost our focus, and we just want to go back closer to where we were in terms of this priority.

Kerr: One of the things your book combines is both empirical evidence—kind of up-to-date research findings, like the social rate of return being greater than 50 percent—but also some historical perspective. So tell us a little bit about this World War II post period and kind of the endless frontier of science. Tell us a little bit about that history.

Johnson: Well, in June 1940, actually the U.S. was not a major scientific superpower. We were good at engineering, but the best science in the world was done in Western Europe—in Germany, the U.K., and France. Some of our leaders—scientific and political leaders—decided that it was wise, given the global situation, to put more resources into developing science that could be used, frankly, for the purposes of war. That effort was remarkably successful. They developed radar. They developed all kinds of innovations around aircraft engines. They developed, of course, the atom bomb. And as the war drew to a close, the same people said, “What can we do for peace? What can we do for productivity? What can we do for good jobs? What can we do for health?” And they built the National Science Foundation. They built the National Institutes of Health. They put real money behind these initiatives. And, of course, in the 1950s, responding to the Soviet challenge, they built NASA.

Kerr: So what happened? Like, if we find ourselves today without that investment, what changed?

Johnson: I think several, several things changed. First of all, the politicians fell out with the scientists. The scientists were not enthusiastic about civilian supersonic aircraft, for example. There are number of other points of friction. The science was oversold and maybe used inappropriately—so the debate about pesticides, for example, something we talk about in the book; the concerns that developed around the safety of nuclear power, also. And, of course, the federal budget became much tighter since the 1960s as a result of the turn against taxes and also some of the bigger social commitments taken on, like the Medicare program.

Kerr: So fiscal pressures plus also not achieving all of the dreams that were initially set and so forth, after a very remarkable wartime dividend to these types of investments, then also in the years and decades that followed.

Gruber: Yeah, not just wartime. I mean, you think about this whole period of time, and you think about all the sectors that made America great—from aircraft to digital computing to pharmaceuticals—all came out of government funding, then partnering with the private sector and universities to turn that government funding into new ideas and ultimately into jobs. And that was what was really amazing about this period, was that, essentially—and I think a misunderstood piece of our history; we talk about this sort of forgotten history—that if you look back at all the sectors that really drove American growth, they all grew out of government investments, ultimately, in R&D, either at universities or in partnerships with private companies. You look at companies like IBM, which was sort of a middle-sized company, and the government did all its R&D and provided contracts. You look at satellites, which basically grew out of government research and now creates 170,000 jobs in America, and it’s a market we dominate because we were there first.

Kerr: You also have an example with the Human Genome Project. Walk us through that. What was the amount of money that went in? What’s been the return that comes out? Help put this $100 billion in context and what we’re hoping to achieve with it.

Gruber: You know, I used to wonder, how can The Who play “My Generation” for the thousandth time? But, you know, I’ll never get tired of talking about this example. The Human Genome Project, we all know the genetic code is the basis for understanding illness and deviations in human physiology. In the mid-1980s, people started talking about potentially mapping the human genome, actually sort of getting a whole map of our genetic encoding that might be useful for treating disease. A Nobel Prize‒winning scientist and prominent entrepreneur, founder of Biogen, tried to get the private sector to fund his company to do this. The private sector would not. Why? Because it’s the classic case of spillovers. You map the human genome, everyone benefits. Why would any one company want to put the money in? So the federal government put in $3 billion over 15 years to fund what was called the Human Genome Project to map the human genome. Actually finished two years ahead of schedule. Fast-forward to today. That was the basis of a genomics industry dominated by America, which has 300,000 jobs, with an average wage of $70,000 per year, and most interestingly, pay $6 billion a year in taxes. So talk about a rate of return. We invested $3 billion over 15 years. We’re now getting $6 billion a year in tax revenue in America from that.

Kerr: And you make a distinction here. It’s not just about encouraging more private R&D, but the public has to step up, and public R&D needs to play a role. Walk us through a little bit more detail about the differences between those. Why is it that the public R&D needs the boost here?

Gruber:strong> Basically, there’s two fundamental reasons why private R&D won’t do enough. Look, we’re big fans of the private sector. Simon’s at a business school, after all.

Kerr: And a great place to be.

Gruber: A great place to be. I mean, better to be at MIT and Harvard, but still, you know, a good place to be. But basically we believe the private sector has to lead. But there are two fundamental limitations to the private-sector role here. The first, as Simon mentioned, is spillovers—private sector companies will not invest in science that doesn’t benefit their own bottom line, especially if it might benefit their competitors. As a result, the social returns to R&D are much larger than the private returns. The second problem is the so-called “Valley of Death” problem, which you know about, Bill—you’ve done some work on —the problem that essentially financing through the VC [venture capital] sector, they’re interested in short run hits. They’re interested in sort of small millions of dollars from investments that can produce short-run hits. They don’t want giant investments that will take years to pan out. For those two reasons, the private sector is not doing the level of innovation they should, and that’s why the government needs to get involved and fix those market failures.

Kerr: Yeah. The time horizons on the innovations and the funding around that can be mismatched. We see it both in the very early phases of trying to do the experimentation very, very long ways out and then also when you’re scaling up those big projects. That can be a challenge.

Gruber: And this is not us just being sort of off-the-cuff liberals. This is based on research that you and many other people have done showing that these are real empirically important phenomena.

Kerr: I think you guys call yourselves “radical centrists.” Was that the phrasing?

Johnson: That would be acceptable phrasing. We’re thinking ... look, if you buy the basic economics, which is based on a lot of research, you should want to do more of this R&D, and you should want to do a lot more, because there are agglomeration effects. So you put enough money into a place, you’re going to pull in a lot more talent. You’re going to pull in more private-sector follow-on investment. It’s a very big country with a lot of people who want to work. Look at the response to Amazon HQ2’s RFP—their request for proposals to be the host for 50,000 new jobs. Two hundred and thirty communities across the United States raised their hand and said, “Yes, we want those jobs.” Of course, they decided to put the jobs in New York and Washington, D.C. We think actually there is a lot of talent, a lot of potential, in the rest of the country, but don’t just do one or don’t just do two; we think you should do 20 or 30. That’s about $100 billion a year, if you really want to scale it up properly. So it is radical. But we find people on the left and people on the right—it’s all pretty much behind closed doors right now—but people across the political spectrum agreeing with us. So I think that makes us some sort of centrists.

Kerr: You don’t want to just increase public R&D and allocate it the way it’s being currently allocated. You’re suggesting—Boston, New York, San Francisco, they’re doing fine—let’s find new places in the heartland of America to start building technology clusters. Walk us through that argument, building on HQ2, but also, what’s the rationale for making those types of investments?

Gruber: Both public and private R&D is very concentrated in America in just a few states, in just a few cities, honestly. Two-thirds of venture capital is in five cities in America. Okay. It’s hard, and we’ve become this economy that’s marked by what we call agglomeration, marked by the fact that talent wants to go where talent already is. So the places that are very successful draw the new, most-talented people. And while those places grow, it creates a vicious cycle for other places in the country that can’t rise to that level of competition. But those other places have skills. They have talents. So what we do in the book is we actually identify places that have at least a 100,000 people of working-age population, are highly educated, and have affordable houses—a house price less than $265,000 on average. Those are 102 places in 36 states with 80 million people living in them. This is not a few places we’re picking out; this is broadly distributed across the country, hubs of opportunity that could exist. But today they can’t compete because basically the next Amazon is still just going to go to New York, D.C., or Seattle or San Francisco. We need to make it so when the next Amazon chooses in five years, there’s more than just five places they might consider seriously.

Johnson: Everywhere in America, basically, where you have substantial cities—you’ve got the upper Midwest, you’ve got sort of the leftovers of a previous generation of technology, but you’ve got the South. Huntsville, Alabama, is a great place for aerospace tech, for example. Alabama, itself, has got six places. Louisiana, Baton Rouge, New Orleans. There’s places in Texas. There’s places further west, although some of the obvious states, actually, don’t feature so much in our index. For example, California has got great innovation, but also very expensive real estate. So we’re shifting attention, rather, away from some of the more obvious candidates.

Kerr: And is this an economic argument? Is it a political argument? Is it both, in terms of spreading kind of where this allocation would happen?

Gruber: I would say it’s both. I would say the economic argument is: There’s an “on the one hand, on the other hand.” On the one hand, there are potentially enormous missing opportunities from the fact that companies won’t even give these places a shot. There’s research by Raj Chetty and others that talks about the sort of forgotten Einsteins who live in these cities but can’t start new companies because the VC isn’t there and the funding isn’t there. On the other hand, we do agree: There’s a lot of talented scientists and expertise on the coasts. And I can’t honestly prove to you where the next dollar will be more economically productive, but what I can tell you is, politically, it’s going to be a lot more productive to spread this around rather than just continue the breaking apart of America that we’ve seen from the current structure. So I think our argument is somewhat in economic grounds, but a lot on political grounds, to be honest.

Johnson: In the late 1940s, the founding of this whole enterprise, there was a big debate between some establishment scientists on the one hand and some rather progressive senators—Senator Kilgore of West Virginia was the leader of that—who were arguing, “Put the money where the science/scientists are already.” And the New Deal Senator was saying, “Actually, you should spread it more around the country.” When I think, when you look back, we’ve had some great successes at the whole enterprise. It’s been remarkable In terms of its achievements. But politically, we think it would have fared better if they had actually found more ways to make sensible investments in new hubs across a larger number of states.

Gruber: And let’s be clear, Bill. This is very important. We’re not viewing this as a welfare program. Okay? This is not just, okay, we spread the money around. That’s why we distinctly say less than 50 places. Once you get to 50, every state gets one. We don’t want that. We want places to compete. Let’s take the kind of competition that Amazon did, but instead of a race to the bottom where you can keep offering bigger and bigger tax breaks, have a race to the top, where you compete by showing that you can be the tech hub of the future, that you have the educational resources, the infrastructure, the transportation, the social institutions, et cetera, so that you can be a new technology hub. So we want to spread the wealth, but not just for the political sake of spreading it. We’re trying to find this compromise to make sure that it’s still economically efficient, but that it’s spread more broadly.

Kerr: So the criteria that you mentioned earlier—population, education, and the housing price—those are qualifying criteria to enter into this. And then you have to be able to say what you would do to make sure that the gains are spread broadly. How you would improve the lifestyle and education? There will be a more-complex bidding process, but in a more productive way?

Gruber: That’s our goal. And, look, let’s be very clear: We have a website—jump-startingamerica.com—where you can actually go and take 102 sites and break them apart. Say, “I don’t like that. I don’t like the way you put your weights on it. You could have grouped this city with that city.” We want people to engage. We’re trying to raise this discussion, not end it. And we don’t claim we found the right place or even put them in the right order. This is just to recognize to get people’s attention on the fact there are lots of these opportunities all across the country.

Kerr: Another part of your proposal is what you call “innovation dividend.” So there’s one sort of advantage that some places will get by being the next tech hubs and the jobs and local investments in spillovers that result. But then there’s a broader participation for all of America. Tell us about the—first off, where does the dividend come from, and then how would it be shared and distributed?

Johnson: So Alaska has a dividend that they get from oil revenue, oil royalties, and they share that on a per-capita basis. Everybody gets the same amount for all residents every year. It’s usually between $1,000 and $2,000 a year. Now, that may not sound like a lot of money to some of your listeners, but it lifts 20,000 Alaskans out of poverty. Our point is: You’re making these big public investments, you going to generate large social rates of return. Sure, some of the successful people are going to pay taxes, but let’s face it, large successful tech companies don’t pay high rates of taxation in general, right? That’s the reality of today. So let’s find other ways to capture or participate in some of that upside and share that with Americans. Well, the most obvious way that there is upside that you could share them without messing up incentives is through real estate. So government, as a part of any economic development, makes real estate available—its property, its roads, its various other pieces. Structure that in such a way that the appreciation in value and the rise in rents comes to this—what we call “The Innovation Fund”—and have that distributed as a dividend to all Americans. That seems only fair and reasonable. And then for the next big tech boom in the United States, people are actually going to get some cash in their pocket directly from that.

Kerr: There’s been a lot of argument recently about we’ve spent so much money—less than we used to—in public R&D; somebody comes along and builds a company on top of that, reaps great rewards, but the public was the one that helped fund that, and this is one way you can help capture and then redistribute some of those returns around.

Gruber: Every single drug invented between 2010‒2016 was based on National Institutes of Health‒funded research. Okay. The private sector innovates and partners with public sector; moreover every dollar running its research generates $8 of private research money. They work together best. But if they’re going to work together, we need to make sure the public gets the upside as well.

Kerr: You’re not crowning, you’re not selecting at this point, but just with the basic sort of structure that you set up, what are some of the examples of what would be the innovation hubs that might pop out of this list?

Johnson: Well, Rochester is one. We have an event in Rochester called “Jump-Starting Rochester.” That’s what they called it when they read the book. I thought that was fantastic. That’s the kind of enthusiasm we’re looking for. Pittsburgh is another one that’s really interesting, maybe a little bit further down the road than some others. Huntsville, Alabama, I think is very interesting. Deep, deep history of technology developed there, including the rockets that we used in the Apollo program. Nobody thinks of it in particular as a hub. Baton Rouge in Louisiana, they’re developing tech around water. They have a big issue with rising water levels, and so they’re at the forefront of thinking about how to mitigate some of those issues and deal with them and prevent them from being devastating. The list goes on. There are many, many places that are good at some aspects of technology, and this initiative will be partly about recognizing that, but also about massively scaling it up.

Gruber: I think some of the list is surprising, and that’s why it’s really important to go to our website and check it out, because some of the lists will surprise you. There are so many excellent universities in America—after all, we do dominate the world in higher education—and they’re all over the country, and I think that there’s great opportunities all over the place.

Kerr: Maybe give that URL one more time.

Gruber: It’s jump-startingamerica.com.

Kerr: How are you going to choose which projects to actually put the money in? So you have the cities covered, but give us examples of what’s the Human Genome Project for the next decade that you’re thinking about? Or how would you go about deciding what projects get investment?

Gruber: Once again, we are viewing this book as starting a conversation, not ending it. So rather than tell you what they are, we’ll tell you what they could be. We have a number of examples in the book. One example is synthetic biology. This is basically a field where you essential recreate organisms in the laboratory. The early success was creating an artificial vaccine for malaria, which has saved millions of lives, but this is going on in tons of directions—from drugs to save lives to water bottles that decompose in a week instead of 1,000 years. These are all enormous directions. We have numbers of examples like this that share the common features: A) they were invented in America based on government-funded science; B) they grew rapidly in America; C) the government stopped funding them; and D) they’re not growing elsewhere in the world. Synthetic biology was set up by NSF grants that ended. Now China is starting to dominate the world on that. Simon could talk about other examples in the paper today.

Johnson: I think that you have to have a political discussion and a decision at the top—meaning between the presidency and Congress—about what are your priorities for technology. But here’s a really good example, which is energy and climate. On the one hand, we have people proposing what they’re calling a “Green New Deal.” On the other hand, across the political aisle, people are proposing a new, renewed push for safe nuclear power. We’re not taking a position in which route to go, but whichever route you go, you can use the machinery we proposed in our book as a way to implement and a way to make sure that you get good jobs upfront in the process of doing the R&D, and good jobs through the follow-on investments that the private companies will bring to that community. So make the strategic decision on tech priorities, and then run it through the kind of competition and the kind of pro-growth incentive schemes that we have. And then make sure you get an innovation dividend.

Kerr: And how are you guys going to imagine it? Will Congress make choices about, you know, which cities are selected? Is that the President’s job? How do you imagine the selection process being truly governed in the end?

Gruber: Once again, we try to learn from history where possible. One of the most difficult political decisions we’ve had over the last 40 years is closing military basis. That’s hard, because communities get jobs through military bases. So Congress set up a commission—called the Base Realignment and Closure Commission—that had to recommend which bases to close and open. Remember House Of Cards Season 1, this figured pretty prominently, and they sent that list to Congress to vote on an up or down basis. So Congress couldn’t cherry pick. Congress just financed it and they voted on an up or down basis. We propose a technology hub-opening commission based on the same principle: an apolitical commission. It will clearly have representation from Congress, from the business sector, from scientific leaders, from local leaders. But they would make the difficult decision; this will not work if it’s not depoliticized.

Kerr: In the book, you have a rich opening history of from World War II and what follows with Sputnik as well as also the response to Nazi aggression and so forth. As you think about today, is it going to be easier or harder with the geopolitical context to do this type of investment program? Do we have a Sputnik-like moment that can galvanize these types of investments?

Johnson: Well, we’ve certainly not had the moment of Sputnik or the moment of realization that you’ve fallen behind some critical technology race, which is what happened in 1957. However—we’ve tried to make this clear in the book—without excessive fear mongering or overreacting, when you scan the horizon for technology to developing that have these characteristics of being potentially transformative and creating lots of new good jobs, you do find China present in pretty much every single space. And what are they doing? They’re doing what we used to do, which is a lot of basic investments and then trying to figure out how to get private companies to further the applications and then the manufacturing. So the Chinese are very conscious of this as a strategy. I think we have some big advantages in the United States as an innovative place. I don’t think we’ve fallen behind, so I don’t want to be interpreted in that way. But the pressure is on. And if you think about global competition, competition of who is going to have the good jobs, we feel that this pressure will only mount in the coming years.

Gruber: And, and you know, the pressure doesn’t just come externally. It comes internally. It’s pretty universal. Everyone’s lamenting the state of the U.S. economy, in terms of its ability to spread the wealth. You see half a dozen books to come out and last couple of years, all about the dying American middle class, the end of opportunity in America. So there’s an internal motivation, too, which is: How do we address that in a politically feasible way when it’s not going to see the level of redistribution it takes to solve that problem? Politically, it doesn’t seem infeasible. We’re going to do it through growth, and growth that’s balanced, not just growth that benefits the top.

Kerr: Your book is remarkable for the number of international examples, ranging from Finland to China, that you show as well as also these examples of, we had early head starts on something, but then we gave up that leadership to someone else. I’d love to come back closer to home, and you have a very compelling story about Central Florida. Tell us a little bit about what you saw down there that sparks the imagination.

Gruber: Well, this is my favorite example in the book.

Kerr: Even more than the Human Genome Project?

Gruber: That was second. This is number one. In 1956, the editor of the Orlando Sentinel takes a flyer, endorses a little-known Lyndon Johnson for president. Does it again in ’60, and by 1964, Lyndon Johnson’s pretty grateful to this guy and says, “What do you want?” He says, “I want a Navy base in landlocked Orlando.” Well, what do you do with a landlocked Navy base? You set it as a training center. And part of the training was simulation training for battle. In 1978, a midsize university called the University of Central Florida, they had a very entrepreneurial president, who recognized that there was very cheap land south of his university he could buy. So he bought it and said to the Navy, “How about we take this training center, which is now sort of a computer simulation center, move it below my university, and make it the anchor of the Central Florida Research Park?” The Navy agrees to do that. Fast-forward to today. The Central Florida Research Park is the third-largest research park in America, with 10,000 employees, and this area of Orlando, not Disney, 45 minutes east, has added 100,000 jobs over 30 years. And the University of Central Florida, besides almost beating Duke in the NCAA Tournament in 2019, is now the largest university in America by enrollment, has the 13th-ranked electrical engineering department. That is a story of really a local renaissance. This city is now the world center of the computer micro-simulation industry, out of initial government investment and strategic help from the private sector and universities.

Kerr: So you want to have a slightly more rigorous selection process next time than “Here’s your Navy base.”

Gruber: But, actually, no. There’s three problems, actually. There’s three problems with that story. Okay? Problem one is, you’re right. That’s a terrible way to choose it. Problem two is, Orlando is still 45th in the country in venture capital. So what happens is these companies start there, then move to Seattle and San Francisco and New York. So you need more of a jump-start. They haven’t had a big enough jump-start. Problem three is the Florida educational system has problems, and you need a better educational system to grow as well.

Kerr: And you’ve talked about the challenge—it has to be a good climate for business, lower tax rates, and so forth, but at the same time, those taxes are what’s funding the infrastructure, like education and roads and so forth.

Johnson: Yeah, we think a big problem with the current situation around America is that cities and governments spend about $50 billion a year on tax breaks for companies. The companies were going, most of the evidence, people who looked at this carefully find that the companies were going to make that investment in that community, anyway. So you just gave them basically a transfer. Now, maybe it’s good news for the shareholders of those companies, but where are the revenues that you need to support infrastructure, support the schooling, to support the future of work and the kind of technical training that requires? It’s being eroded by this, what some people call the war between the states. We are proposing to shift from a race to the bottom, which is the tax competition, to a win-win race to the top competition.

Kerr: So you’re not taking money out of a pot that would go toward improved health or safety or defense, but it’s a pot that would go out of, here’s a tax break for a large organization like Foxconn to go into Wisconsin. We could use that as a better resource, better allocation.

Johnson: Absolutely. We want new federal money to be put in. We think there’s very high rates of return. It’s absolutely a sensible investment on the public side at the federal level. We want state and local governments to put in resources and to make a commitment along various dimensions. But the way they should think about funding that is money they’re not giving away in this destructive tax competition.

Kerr: This notion of cities competing to be the best is a very inspirational notion. So tell us, guys, you both have extensive experience in Washington and similar. What’s the next path with this book? Like, you’re starting the conversation, but any chance a presidential hopeful will pick up on some of these things?

Johnson: You know, I think it’s interesting that the way in which ideas get adopted or not adopted in the public space. You need there to be a discussion. You need there to be animation. You need a buzz around ideas. You need them to get kicked around. And I think we’re realistic and experienced enough to know nobody takes your entire book and says, “Yes, this is now my policy.” It percolates through. I think you win, Bill, at the time you sit down with lunch with someone and that someone says, “You know, we’ve got this big new idea. I want to know what you think about it.” And they give you back your idea without even realizing it’s your idea. And when that happens to me, I just, I usually nod and just say, “Yeah, that’s a good idea. I’ve heard of it.”

Kerr: Very good. We thank Simon Johnson and Jon Gruber for sharing insights on how to restart American growth from their book, Jump-Starting America. I highly recommend everyone get a copy, and thanks, guys, for coming today.

Johnson: Thanks so much.

Gruber: Thank you.

Kerr: And thanks to all of you for listening in.