I had a great chat with Dan Gross, one of my favorite economics correspondents, last week about resets and American adaptive capabilities. Dan wrote a terrific Newsweek story and we got to team up for a nice segment on Newsweek Radio 9.

“We are the most adaptive, inventive nation, and have proven quite resilient,” says Richard Florida, sociologist and author of The Great Reset: How New Ways of Living and Working Drive Post-Crash Prosperity. If these impulses are embraced more systematically and wholeheartedly, the U.S. can remain an economic superpower well into the current century.

One thing that struck me was how my working-class father instinctively understood the power of America’s capacity to rebound and reset its economy and society. Here is how I described his words in my book Flight of the Creative Class:

As a young teenager he went to work to help his family during the Great Depression, an infantry solider who enlisted in the Army the day after Pearl Harbor, landed on Normandy, and fought in all the major battles of World War II, and a man who spent his life in manufacturing, he would always say: “Richard, no one should ever – never, never – count this country out.  When I enlisted in the Army, we had nothing. They gave us doughboy hats and old uniforms, our boots often did not fit. There weren’t enough guns to go around in training, so we used wooden facsimiles.  But, boy, did we gear up.  I saw it as soon as I got over there.”  My father who was always afraid of the water would often interject his own personal D-Day story. “Richard,” he would say, “the Germans didn’t scare me, the water did, so I made the ship-to-shore boat driver pull up right on the beach to let me out.”

He would continue, the pride of a D-Day veteran in his eyes: “We all had heard about the technological prowess of the Germans. Their guns were incredible – the Lugers, the machine guns, their fighter planes and tanks – works of technology and of art.”  But, he continued, “You should have seen how we mobilized. Our guns might not have been so state-of-the-art and fancy, a little bit clunky. But they worked and there were lots of them.  Whoever we could get to take over the factories – old people, women, whoever – we kept churning out what was necessary. Guns, ammunition, planes, tanks, support trucks – we never ran out of anything. We turned this country on a dime and built an incredible production machine. That’s why we won.” And he would end, “I think when the Germans—their soldiers and the officers—saw this stuff coming and coming and coming, on and on, without end, they just got demoralized.”

I recalled his words often in the late 1980s, when, as a young professor, I would visit Japan to discuss the manufacturing competition then bracing the world economy.  At the time, I was the studying the increasing prowess of the Japanese manufacturing system and its apparent ability to be transplanted in the United States and around the world – the gleaming new automotive assembly plants and steel rolling mils that were revitalizing our American Midwest. My Japanese hosts, ever polite, would always interject at the end of my remarks.

“Professor Florida,” they would say, “isn’t it so sad what has happened to your country? You were once the envy of the manufacturing world, with your great automotive assembly in Detroit and the towering steel mills of Pittsburgh. We made pilgrimages there to study and learn from you. We studied at the feet of your quality guru, Edward Deming, and others.  But now your factories are falling apart—the technology is low, their productivity poor, and quality truly suffers. We want to help you now. We are building new plants and restoring old ones in your country, to give back to you, the country that taught us so much.”

I would recall my father’s pride and struggle to hold back my own emotion, retorting as politely as possible: “I think it would be a mistake to write the United States off.  We’ve had some tough times, yes.  Your manufacturing system and great factories are now the envy of the world.  But my father, a veteran and a manufacturing expert, always reminded me of America’s skill at bouncing back – it’s amazing ability to transform itself and to turn on a dime. Remember how we rebuilt our economy after the Great Depression. Remember how quickly we mobilized for war.  Never, ever count this country out.  It’s most impressive and constant trait is its willingness to remake itself for new times.”  Sure enough, the 1990s witnessed the high-tech boom and the amazing recovery of the U.S. economy; even as this happened, the Japanese economy mired in recession.

Can we do it again? I agree with Dan that this kind of adapabiity and resilience is a fundamental American advantage. But the time scale is longer than most of us would like to think. Looking back at the previous two economic crises – the Long Depression of the late 19th century and the Great Depression of the 1930s in The Great Reset - I note that the time scale for this kind of resetting process is roughly two to three decades… the better part of a generation. We certainly have better technologies and tools of economic management today, so perhaps we can reduce the adjustment period to a decade or so. Still this strikes me as longer than most people think. Resets don’t happen all at once. They are the products of thousands upon thousands of individual adjustments by firms, governments, and individuals.

In a widely read cover story published earlier this month, Business Week’s chief economist Michael Mandel asks, “To what degree has American innovation been ‘interrupted’?” Mandel argues that the economic crisis is partly the result of America’s failure to generate high-impact commercial innovations.

What if, outside of a few high-profile areas, the past decade has seen far too few commercial innovations that can transform lives and move the economy forward? What if, rather than being an era of rapid innovation, this has been an era of innovation interrupted?

The crux of his argument is that many, if not most, of the big breakthrough innovations that were supposed to occur over the past decade or so have failed to materialize. His article provides a raft of compelling examples of once-heralded innovations – in areas from biotech to micro-machines – that have simply not panned out. This failure to commercialize and diffuse these new breakthrough innovations – America’s inability to set in motion the great gales of “creative destruction” identified long ago by Joseph Schumpeter as key to capitalist growth – he argues, is a key contributor to both the financial bubble and the economic crisis.

But since there is compelling evidence that the figures are overstated by the credit bubble and statistical problems, we can construct a plausible narrative for the financial bust that gives a starring role to innovation-or rather, to the lack of it. It goes something like this: In the late 1990s most economists and CEOs agreed that the U.S. was embarking on a once-in-a-century innovation wave-not just in info tech but also in biotech and many other technologies. Forecasters upped their long-run growth estimates for the U.S. economy. Consumers borrowed against their home equity, assuming their future incomes would rise. And foreign investors lent America money by buying up U.S. securities, assuming the country would come up with enough new products to pay off the accumulated trade deficit.

Mandel lists four areas in which America’s recent performance has been lackluster: stock market performance in the pharmaceutical, biotech, and life-science sectors; declining real wages for highly educated workers; a mounting trade deficit in high-tech sectors (which grew from $30 billion U.S. surplus in 1998, turning into a $53 billion deficit by 2008); and little improvement in the death rate (which he sees as a measure of the failure of breakthrough medical technologies to materialize) as evidence for the failure of American innovation.

It’s no secret that I’m a big fan of Mandel and I find his general thesis about lagging U.S. productivity and job growth over the past decade or so to be both intriguing and plausible. And since so much of my own work focused on the relationship between innovation and American competitiveness was flagging, I find myself particularly drawn to his most recent “innovation-interrupted” thesis.

My first book, The Breakthrough Illusion, written with Martin Kenney in 1990, argued that the U.S. system of venture capital-backed breakthrough innovation was skewed to encourage short-term super-returns from new breakthrough innovations, and was structurally ill-suited to capturing the longer-term wealth derived from developing these innovations into successful products and industries. That work drew upon the intriguing thesis of innovation theorist Henry Ergas, who argued that the U.S. had developed a shifting system of innovation geared to near-constant development of new products through new firms, as opposed to a deepening system (think of German cars) which continuously adds technology to upgrade existing industries. According to Ergas, the key to long-run prosperity lies in synthesizing both strategies – cultivating an economy which could deploy new technologies in new sectors while at the same time deploying them to upgrade and revolutionize old ones.

I opened my 2002 book, Rise of the Creative Class, with a time-traveler experiment. Someone traveling from 1900 to 1950 would be blown away by the varied technical marvels that surrounded them from televisions to airplanes. But while someone who time-traveled from 1950 to the 2000 would see a few new technologies, like the personal computer and the cell phone, he or she would likely be much more amazed by sweeping social changes. And in my 2004 book, Flight of the Creative Class, I argued that America’s innovative edge in the late 20^th century was inextricably tied to its ability to attract foreign scientists, technologists, and engineers. The combination of mounting U.S. immigration restrictions and growing efforts by foreign countries to retain their own best and brightest (and attract others from around the world), I suggested, was an under-appreciated threat to U.S. competitiveness and prosperity.

In fact, I found Mandel’s essay so compelling that I decided to take a look at the actual data. Mandel rightly says that we currently lack a comprehensive “innovation index” that tracks commercial innovation: “There’s no government-constructed “innovation index” that would allow us to conclude unambiguously that we’ve been experiencing an innovation shortfall. Still, plenty of clues point in that direction.”

True enough. But research into the economics of innovation has discovered at least one reasonable measure of innovation – patents. There are problems and biases with using patents as a measure of innovation, as economists who specialize in the subject have pointed out. Patents measure certain areas of technology more than others. In some areas of commercially important R&D, patents are rarely used. Other areas, including less commercially relevant ones, are awash in patents for minutiae. And patents are not synonymous with commercially relevant innovations. That said, patents do provide a consistent, broad-gauge indicator of the level and rate of innovation – one that can be tracked over long periods of time and be broken out by nation, city, and region, and by U.S. resident versus non-resident or foreign inventors.

With my Prosperity Institute team – Charlotte Mellander, Scott Pennington, Dieter Kogler, and Patrick Adler – I’ve taken a look at the trends in U.S.-patented innovations. In a series of posts this week, I will report our findings. Tomorrow we’ll look at the trends in U.S. patents over time. Wednesday we’ll explore patenting by U.S. resident versus non-resident (foreign) inventors. Thursday we’ll examine the geographic distribution of innovation – tracking the rise of some innovative regions and the fall of others. And Friday we’ll discuss the longer-run historical relationship between innovation and economic crises.

Anti-immigration sentiment has been rising in the U.S. and Europe as the economic slump deepens. But how has the relationship between mobility and the economy played out historically? How have economic crises affected immigration and global flows of people?

A new study by economists Timothy Hatton of the Australian National University and Harvard’s Jeffrey G. Williamson takes a close look, examining changing patterns of global mobility and immigration, as well as shifts in public opinion toward immigrants in light of major economic cycles. And they find that previous economic crises in the U.S. and other advanced nations have led to sharp declines in immigration and global mobility.

[T]he rise in unemployment abroad had nearly three times the effect on emigration from the UK between 1870 and 1913 as a rise in unemployment at home. During the slump of the early 1890s, gross immigration to the US fell by half and net migration to Australia evaporated. During the Great Depression, net immigration to the US, Canada, Australia and Argentina turned negative as new immigration virtually ceased and as previous immigrants headed home …

But how big are these effects? Where immigration policies are not too restrictive, history tells us that every 100 jobs lost in a high-immigration country results in 10 fewer immigrants. This 10% rule described countries like Canada and Australia in the Great Depression, and it worked pretty well for other periods too. During the severe 1890s depression in the US, net immigrant exits reduced the unemployment rate by about 1.6 percentage points.

The following graph from their study shows the relationship between the unemployment and the net immigration rate per thousand of the population (including illegal immigrants) for the U.S. between 1990 and 2004.

Interestingly enough, anti-immigrant sentiment in the advanced countries has been kept at bay during the current slump: Hattel and Williamson conclude that the “current world crisis will reduce immigration, and the long-run pressure to immigrate will continue to ease after it is over.”

One of the most powerful, though least understood, effects of economic crises is their ability to alter global talent flows. Economic history shows that major economic crises like the current, can and frequently do produce considerable alterations in global flows of talent - particularly high-skill, highly inventive, and highly entrepreneurial immigrants. The U.S., which had previously been sending its own talent abroad for scientific and technical training, gained immeasurably from a massive inflow of high-skill immigrants during the crisis of the late 19th century and perhaps even more so in the flood of scientific, artistic, and entrepreneurial talent during the Great Depression.

The current crisis holds out the potential to again reset the flow of global talent. If so, this could have even bigger consequences than in previous times – and for an obvious reason. Economists agree that economic growth and technological innovation today revolve around human capital. We also know that innovative and entrepreneurial talent is highly mobile, highly skewed, and highly clustered geographically. Foreign-born talent composes an estimated third to half of all recent Silicon Valley high-tech start-ups, according to recent studies; and foreign-born engineers make up a huge percentage of their technical staff. The countries and regions that nurture, attract, and retain global talent gain enormous economic advantage.

We may be in the early phases of such a talent reset today. More potential immigrants appear to be choosing to stay home, as Hattel and Williamson note, partly because conditions in several of the most important emerging economies like India and China have improved, relatively speaking. And a number of countries like Canada and Australia, and some in Scandinavia and Northern Europe, have upped their own efforts to attract high-skill immigrants. The U.S. with rising anti-immigrant sentiment, homeland security restrictions, and declining economic opportunities may be seeing its talent advantage wane.

Global talent flows can shift quickly. And, the global competition for talent is a game that is played at the margins. As I outlined in Flight of the Creative Class, while no single one country has to replace America as the predominant destination for global talent, many countries appear to be improving their relative position. Say 10 or 20 percent more of China and India’s top talent decided to stay put, while countries like Canada, Australia, and others up their draw by five or 10 or 20 percent. Those numbers add up quickly.

Anti-immigration stances and other measures that impede talent flows may offer some political gains, but they will only undermine long-run innovation and prosperity. Those nations and regions that maintain and expand their ability to attract global talent  will emerge as global winners when economic growth rebounds.

From today’s Globe and Mail:

Toronto’s mosaic an example for American cities

RICHARD FLORIDA

May 2, 2009

En route to obtaining his back-dated, life-long Canadian citizenship, Will Wilkinson, a research fellow at Washington’s Cato Institute, and one of the sharpest young policy minds around, dropped by to visit at the Prosperity Institute.

Back home stateside, he wrote this terrific essay on why Toronto’s largely successful experiment in immigration – its global-straddling ethnic mosaic – is a big smack upside the head for notions that immigration is eating away at core “Anglo-Protestant” values and institutions, à la the late Samuel Huntington. Here’s an excerpt.

WILKINSON ON TORONTO

From Will Wilkinson’s column in the online forum, The Street, April 27, 2009:

“Here is what Toronto is not: Toronto is not dirty, dangerous, or poor. Toronto is not a hell of lost liberties or a babble of cultural incoherence or a ruin of failed institutions. Yet a popular argument against high levels of immigration suggests it should be.

“In his 2004 book, Who Are We?: The Challenges to America’s National Identity, the late Harvard political scientist Samuel Huntington warned that “the United States of America will suffer the fate of Sparta and Rome,” should its founding Anglo-Protestant culture continue to wane … [so] we must keep outsiders out.

“Successful societies (so this argument goes) owe their liberty and prosperity to distinct institutions which, in turn, depend on the persistence and dominance of the culture that established and nurtured them. Should that culture fade – or become too diluted by the customs, religions, and tongues of outsiders – the foundation of all that is best and most attractive about that society cannot long last.

“But somebody forgot to tell Toronto! “Nearly half the denizens of Canada’s most populous metropolis were born outside the nation’s borders – 47 percent, according to the 2006 census, and the number is rising.

“This makes Toronto the fifth-biggest city in North America, also the most diverse city in North America. Neither Miami, nor Los Angeles, nor New York City can compete with Toronto’s cosmopolitan credentials.

“Here is what Toronto is: the fifth-most-livable city in the world. So said the Economist Intelligence Unit in a report last year drawing on indicators of stability, health care, culture, environment, education, and infrastructure. … “The United States, [a] fabled land of immigrants, has fallen dismally far behind countries like Australia and Canada in openness to immigration …That cultural-fragility argument is false, and it deserves to die.

“Toronto, which has an Anglo-Protestant heritage as strong as any, has proved it dead wrong. In fact, Toronto shows that a community and its core institutions can not only survive a massive and growing immigrant population but thrive with one. … “Maybe some day an American city will place in the top 10 on the list of the world’s most livable places. Maybe – if it becomes more like Toronto…”

FLORIDA ON WILKINSON

I could not agree more. Mr. Wilkinson hits several nails directly on the head here. In my book, Flight of the Creative Class, I similarly argued against Mr. Huntington. And I offered that Canada’s – and Toronto’s – mosaic principle may well prove to be one of the core enduring principles of our economy and society.

Or, as Mr. Wilkinson concludes: “Maybe some day an American city will place in the top 10 on the list of the world’s most livable places. Maybe – if it becomes more like Toronto…”

The H-1B’s spousal complement, the dreaded H-4 or “dependent” visa, means if he wants to stay and work in America, his brilliant, cheerful and pregnant wife Samvita Padukone, 27, would be chained at home by work restrictions. “The H-4 is out,” he says, sitting next to Padukone in their Toronto home. “Because there’s no way that I would be comfortable – I mean, I don’t have the right, to tell my wife `You have to sit at home and be barefoot and pregnant.’ No one has the right to tell anyone that, let alone someone who studied in Singapore on scholarship.” …

The couple’s situation isn’t unique. Mavinkurve, who works on digital mapping and was recently promoted to head a team at Google’s California headquarters, says he is one of several Google employees stationed in Canada because of American visa restrictions. Noting that Alberta has targeted H-1B holders, he says “Canada is already showing signs of capitalizing on America’s misguided `walls.’” …

“It’s hard for me to know what `from’ means. I was born in Bombay and I have a lot of family there. But I grew up in Saudi Arabia, because that’s where my dad was working for a long time. And then at the age of 14 I went to America,” he says. “The baby will just, kind of, be born whenever, wherever we are.” Living here and working for a company in California presents its own, uniquely modern challenges” …

This past Saturday we went to a party in Miami hosted by a young gay couple who are planning on having a family – one’s a Canadian with long experience in financing sustainable investments in emerging economies, the other an American with strong ties to Miami. They’re looking at houses in Toronto – because it’s a great place to raise a family and because of the economic crisis.

Crises are times when the relative positions of nations and cities can, and frequently do, change quickly. The closing of European economies during the late 20s and 30s causes a massive movement of top scientific, entrepreneurial, and creative talent to the United States. I’m not saying anything like that will happen to the U.S. But when it comes to top talent, the margin can really matter. If talented people or their spouses face obstacles to working and living in the U.S., they will go elsewhere: some will return home, some may go to Canada.  Enterprising companies will open up facilities where needed to attract this talent. Over time, these sorts of places can develop a self-reinforcing cycle of growth, developing greater abilities to attract talent.

When I wrote it way back in 2005, I argued that the biggest competitive threat facing the U.S. – and in fact the key to economic competitiveness – is the continued ability to attract global talent. Many simply smirked – thinking not a problem, really, because the world is flat – in a flat world after all, you no longer have to emigrate in order to innovate. Check out this ABC News Report:

Job losses and fears of a recession could lead more foreign workers and students in the United States to move back to their home countries – and that has some economic observers worried.
Vivek Wadhwa, an executive resident at Duke University and a senior research associate at Harvard, believes that the United States is headed for a massive reverse brain drain … “It’s a ticking time bomb for the U.S.,” the former entrepreneur said. “If they [foreign nationals] go back to their home countries, not only will we lose critical talent we need for the future, we will also bolster our competition.” … In the current climate, when hiring has declined, visa restrictions – which make it harder for workers to stay in the U.S. without a job – create significant challenges for foreign workers. … Large companies that traditionally recruited foreign talent on visas has declined as many have cut back on hiring. … Foreign students and workers tend to go back to their home after a certain period of time – often because of family – but that trend is likely to accelerate.

It’s usually the best and brightest who come to U.S. universities to study, and when they go back to their home countries, they tend to move to industries that compete with those in the United States, such as engineering, information technology and research and development.”They are fueling the rise of India and China,” said Wadhwa, who predicts that in the next five years, 100,000 Indian and Chinese workers and students will move back. That would be a considerable number, given that it matches the amount who have left over the last 20 years. But it is not just the economic downturn and visa issues that are keeping foreigners from working in the United States. Educators say opportunities abroad, specifically in Asia, also are luring both foreigners and U.S. citizens.

Economic and financial crises are one thing. But they hurt far worse when they begin to redirect the global flow of talent. In his seminal history of global economic and financial centers, Capital of Capitals, Youssef Cassis argues that the shift from one economic and financial center to another usually requires a catacylismic event like a war or economic crisis and  accompanying restrictions on global inflows of talent. The financial crisis is really just the tip of the proverbial iceberg.

U.S. cities are now as unequal as those in Africa, according to a new UN report (via Planetizen).

Major U.S. cities including New York, Washington, Atlanta and New Orleans have levels of economic inequality that rival cities in Africa … The most balanced city in the world is Beijing, with the most egalitarian cities on average to be found in western Europe … “The authors (of the study) find that though the cities in the United States of America have relatively lower levels of poverty than many other cities in the developed world, their levels of income inequality are quite high,” the report said.

Another new study on inequality in U.S. urban areas by Ed Glaeser and colleagues (via Mark Thoma) sheds light on this, finding that urban inequality which was previously reflected poverty concentration now reflects the increasing concentration of wealthier, higher-skilled populations in certain urban areas.

What determines the degree of inequality across metropolitan areas? Twenty years ago, metropolitan inequality was strongly associated with poverty, but today, inequality is more strongly linked to the presence of the wealthy. Inequality in skills can explain about one third of the variation in income inequality, and that skill inequality is itself explained by historical schooling patterns and immigration. There are also substantial differences in the returns to skill, related to local concentrations in different industries, and these too are strongly correlated with inequality.

This jibes with our analysis in Flight of the Creative Class which found that highly innovative and creative regions were among the most unequal.

America’s economic geography is becoming spikier and more unequal both within as well as between regions.