SPUTNIKONOMICS

When President Obama, in his State of the Union address, laid out a plan for the U.S. to “win the future,” there seemed to be some sleight of hand at work. He said that the government needed to cut “excessive” expenditures lest we be buried beneath “a mountain of debt,” and called for a five-year freeze on domestic spending. But he also called for sharp increases in investments in infrastructure, education, and new technology, which will cost many billions of dollars. With no tax increases in the offing and the government running a $1.5-trillion deficit, a new “Sputnik moment” means adding to the mountain of debt.

Republicans were quick to attack Obama for proposing more spending on the heels of his 2009 stimulus plan. But Sputnikonomics involves something quite different. The stimulus was a Keynesian measure: spending by businesses and individuals had plummeted, so the government stepped in to plug a hole in demand. Obama’s new plan may have some stimulus-like effects—creating new jobs, say—but the focus is entirely different. Instead of trying to stimulate short-term demand, the plan seeks to improve our long-term growth rate by boosting supply: increasing the pace of innovation, and making workers more productive and commerce more efficient. In that sense, it’s a supply-side plan—a phrase we typically associate with Ronald Reagan—not a demand-side one.

Why do this when Washington is obsessed with tightening its belt? Because spending on infrastructure, R. & D., and education has the potential to create more value than it costs. The return on investment from the building of the Interstate Highway System in the nineteen-fifties and sixties has been estimated at thirty-five per cent annually. The economists Kevin Murphy and Robert Topel have suggested that the social benefits of medical research reach into the trillions of dollars. And investments in military technology during the original Sputnik moment gave us, among other things, satellites, the microchip, G.P.S., and the Internet, the cumulative benefits of which are incalculable.

Read the rest: http://www.newyorker.com/talk/financial/2011/02/14/110214ta_talk_surowiecki