As we saw yesterday, Michael Mandel argues that commercial innovation in the U.S. has slowed in recent years. To shed light on this, my team and I tracked U.S. patent data for the past decade – and for the entire 20^th century.

The first graph above tracks patent applications and patents granted from 1980 to 2005. Overall, the trend-lines are up. The line is steeper for patent applications, but it also tracks consistently upward for actual patents granted. There are significant dips after the tech-crunch of 2001 and in the wake of the financial bubble, even before the economic crisis of 2008. But those dips do little to throw off the basic upward trajectory of American innovation. In 2007, the overall level of patents granted was significantly higher than a decade earlier.

The second graph below controls for population, tracking the trend in patents per 10,000 residents. The trend-lines tell much the same story. Despite two recent dips, the overall trend in patenting is up considerably over the past decade.

The evidence here does not support the notion of an innovation shortfall. The overall level of innovation is up over the past decade. The most we can say is that the rate of innovation has leveled off in recent years when we control for population. Nonetheless, the trajectory of American innovation remains consistently up.

As we will see tomorrow, the picture gets a bit more complicated when we parse patents by U.S.-born (resident) and foreign (non-resident) inventors.

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.

Michael Mandel has a very good point:

I’ve harped over and over again about the importance of health and education as a driver of growth, in both hiring and spending. Taken together, health and education equals 25% of GDP, and growing.

Obama’s budget just drives that home. Like the stimulus package, the 2010 budget puts an emphasis on health and education. Just two examples: The budget includes $630 billion for health care reform over the next ten years, on top of existing money. In addition, Obama is proposing making the Pell Grants part of the mandatory part of the budget. Education becomes essential rather than discretionary.

Health and education are the floor for the economy going forward.

Less the driver, more the floor. Let me explain. Our research and that of Todd Gabe show that education and health add very little if anything to regional income. It’s sectors and occupations like management, science and technology, and even arts and culture that drive regional income and development. That said, at 25 percent of GDP, eds and meds are the floor of the intangible or creative economy. They provide stable, long-term jobs which pay well. Seems to me they have to be a centerpiece of a long-run economic recovery plan and along with the massive upgrading in pay and working conditions of service jobs.

BusinessWeek’s Michael Mandel writes:

• Our problems are structural, and there’s still a huge force behind the status quo.
• If the last 10 years was just an accumulation of massive debt and stagnating salary, then the next decade going to be hell on Earth!!
• What’s held us back is tech, tech is the next logical step for this economy.
• I would argue that the last decade was one in which we tried to maintain a standard of living way beyond our means by massive borrowing and that the next decade will be the tough one because we are in the beginning stages of having to pay the piper. In the long run we will have to learn to live within our means…
• [Y]ou are touching on the essential question of the postmodern economy: how do we create enough new consumption markets to keep everybody employed?

Agreed: The essential question. It’s not just tech or even the creative destruction of industries. Economic recovery will require a massive shift in how and where we live. Breathing life back into the industries, behavior patterns, and lifestyle arrangements of the old, fordist order won’t work because it simply cannot create new demand and consumption patterns. We actually need to reduce the costs of the old fordist housing, energy, and transport nexus so that these new markets can open. Until we begin to understand this, and think and act – and design public policy with this in mind – we will go absolutely nowhere. Why such a massive failure of intellect and imagination on this score?

The crisis is having uneven effects on jobs. The table below from the Bureau of Labor Statistics (via Michael Mandel) shows the change in employment for 2008. Massive losses are concentrated in what Mandel calls the “tangible sector” – production, construction, and farming and fishing. Health care and education have help up reasonably well, along with management. The intangible sector and creative sector jobs – arts, design, and entertainment; architecture and engineering; computer science and mathematics; and life and physical sciences – are starting to register losses. I’d love to know where in terms of geography these losses are concentrated. But the bigger point is that if this continues the U.S. economy may start to look like the meds-and-eds dependent economies of old rustbelt city-regions. That said, the job losses in the creative or intangible sector are in range of 3-5 percent, while tangible sector losses are in the double digits.

The new unemployment numbers in both the U.S. and Canada are legitimate cause for concern. But as BusinessWeek’s Michael Mandel notes, those job losses are concentrated in the routine-oriented, tangible economy. The intangible or creative economy continues to fare much better:

This morning’s employment report was absolutely horrible, with the unemployment rate rising to 7.6% and almost six hundred thousand jobs lost, in just one month.

But in the midst of the gloom, it’s essential to point out that the damage is still concentrated in the ‘tangible sector’—that is, those industries which either produce,move, or distribute physical goods. In January the percentage of job losses coming from the tangible sector fall somewhere in the range of 75%-85%. (The exact number depends on how many of the temporary help layoffs are in manufacturing, construction, and retail—there’s no way to tell).

Meanwhile, the jobs losses in the intangible sector are much more moderate. Education and healthcare are still growing, and other intangible-producing industries have relatively small losses.

The housing bubble essentially propped up the tangible sector, badly distorting the “real economy” and biasing investment toward it and away from the more rapidly growing and more stable intangible sector. We’ll only begin to get toward recovery when we stop unnecessarily propping up the tangible sector and allow housing prices to fall to more realistic levels, essentially freeing up demand for the goods and services of the still growing intangible sector.

The new issue of BusinessWeek (December 22) finds economist, Michael Mandel digging into the jobs data. What he finds is very interesting: jobs in manufacturing, transportation, construction, and extraction are tanking – what he calls the “tangible sector” and we call the “working class” have cratered, but jobs in professional fields, management, and science and technology – he calls them the “intangible sector,”we say “creative class” – continue to grow. The U.S. economy has lost nearly two million jobs in the past year, close to the 2.2 million jobs lost in the 1973-75 recession (we’ll go past that benchmark soon if we haven’t already), and unemployment (as officially defined) stands at 6.7 percent. But unemployment in manufacturing is 9.4 percent and even higher, 12.1 percent in construction and extraction. Here’s the rub. Of nearly all the 1.9 million jobs lost, 1.8 million of them  were tangible sector jobs. The intangible sector actually added 515,000 jobs. The economic effects of the crisis remain very uneven for socio-economic classes and for regions.

BusinessWeek’s Michael Mandel writes:

[W]hat if the Bernanke-Paulson view is wrong? What if financial stress is a symptom, not a cause? What if we face a wrenching readjustment of the global real economy rather than a crisis of confidence rooted in the financial system? What if Bernanke and Paulson are treating the wrong problem? What if investors, realizing that their long held assumptions about the global economy are wrong, are rationally bailing out of stock markets in almost every country, at least for now?

In fact, there’s good reason to believe that the current crisis reflects a growing realization: Long accepted patterns of cross-border technological transfer, foreign trade, and global finance are simply not sustainable… You can’t pay back rising debt with falling wages; something had to give. The first thing that broke were subprime mortgages, given to less creditworthy borrowers. But once investors started to look, they realized that the entire global edifice was built on an impossibility… That’s why the financial crisis has spread across the globe. Investors are peering at every country, from Kuwait to Korea, asking the question: Is it sound enough to survive if American demand for imports falls? The problem is in the structure of the global real economy, not the financial system.

He’s got a point.

This graphic from Michael Mandel’s BusinessWeek essay tells a most interesting story. U.S. economic growth over the past decade has been premised not on underlying productivity growth but on consumption, much of it fueled by the hyped-up real estate sector and construction and reliant on debt. While official numbers peg U.S. growth over the past decade at roughly a 2.7 percent annual clip, factoring some $3 trillion in excess borrowing and consumption into the picture, Mandel calculates, reduces that to a more anemic 1.3 percent rate.

Some time ago, savvy urbanists like Paul Gottlieb argued that a growing number of U.S. regions had created a fiction of growth by building new homes, malls, and industrial parks in their sprawling suburbs, even when they were not creating jobs or adding people.

Two sides of the very same coin – don’t you think?