Obama's innovation push: Has US really fallen off the cutting edge?

It may sound odd to say that the United States has an innovation challenge. After all, America is the nation of Franklin and Edison, space telescopes and smart phones. It was ranked No. 1 in innovation last year among 139 countries by the World Economic Forum.

"We do big things." That's how President Obama put it recently. But the president had a reason for that innovation pep talk in his State of the Union message, and for making the issue a prominent theme of his budget proposal this week.

He wasn't just pivoting toward the political center. At a time when the US needs millions of new jobs, the nation's competitive edge may be eroding. That's the view of many on the economy's front lines, from business leaders to policy experts to public officials.

In just two years, the US has slipped from first to fourth overall in the Global Competitiveness Index, a ranking by the World Economic Forum. The US can claim top billing in the index's "innovation" component, but other nations are gaining.

"Make no mistake about it: We are in for the fight of our lives," says Robert Ackerman, founder of Allegis Capital, a Silicon Valley venture capital firm. "We are still world-class," but "the only way that we are going to reinvigorate our economy in the United States is through [continued] innovation."

Anxiety about American competitiveness is nothing new, of course. And the mood appears to be one of urgency more than panic. But Mr. Obama's innovation theme in recent weeks is tapping into a deep and genuine concern that America is slipping.

Voices from the crowd

The pace of innovation has slowed during the past generation, argues economist Tyler Cowen in a new e-book called "The Great Stagnation." Picking up the pace, he says, is central to job growth.

Scott Klososky, a business consultant who has headed three start-ups, says he sees the rest of the world "starting to reward the entrepreneurial spirit in ways that it didn't do before." That directly challenges America's core strength. He says the big questions now are: "Can we increase the speed of innovation?" and "Can we stay ahead?"

But if Obama has garnered approval from business groups, that doesn't mean his specific ideas are meeting unqualified support. Many backers of an innovation push would tweak the proposals. And critics caution that an innovation strategy can't substitute for other needed actions.

"You're talking about a very narrow slice of our economy in these proposals," aimed more at big businesses than small ones, says Brad Close of the National Federation of Independent Business. While acknowledging the importance of innovation, he says Obama shouldn't focus on that without first addressing more immediate obstacles to job creation by businesses, regarding health-care costs, regulatory burdens, and rising federal debt.

But experts who study how the economy grows say the role of technological gains shouldn't be played down, either. Advances in technology lay the groundwork for rising living standards – supporting jobs that, in turn, can increase demand for all those plumbers and florists. This is especially true with other nations pushing to catch up to and surpass US industries.

"If you don't have innovation, you have nothing," says Michael Mandel, an economist at the Progressive Policy Institute.

America's economic strengths

The US hasn't descended to the "nothing" end of the scale, of course. America is still the world's leader in science and technology, accounting for 40 percent of the world's spending on research and development and a similar share of patents, noted a 2008 RAND Corp. analysis. The country just can't take that leadership for granted, the report concluded.

The US still holds a clear lead in only two sectors: information technology and biological sciences, says Dr. Mandel, noting that the past decade saw fewer breakthroughs than anticipated, especially in bioscience.

If the US can't win by coasting, what should the priorities be?

The Obama administration recommends a "pyramid" model, with a foundation of education and infrastructure; a next level of policies to promote market innovation; and a top-tier focus on encouraging breakthroughs in priority industries: energy, biotech, health care, nanotech, advanced manufacturing, space, and educational technologies.

Obama's specific proposals have met a mix of praise and criticism:

Basic research. This may be the area of widest agreement. Policy experts say that government must lead in basic research, while corporations are best at applying that knowledge in product development. For government, this means both direct efforts in federal labs and also indirect support for private and university research.

Education. Obama said the US should again lead the world in college graduation rates, but critics say technical school may serve many young people better than an expensive degree.

Immigration. Business leaders generally laud Obama's efforts to make it easier for bright foreigners to work and help start businesses in the US. They argue that so-called "H1B" visas have become hostage to the debate over broader immigration policies. "We should be stapling a visa with a path to citizenship to every one of those PhDs" received by foreign students, Mr. Ackerman says.

Infrastructure. America has a deep backlog of needed upgrades to everything from airports to schools, according to the American Society of Civil Engineers. It's not high-tech, but it undergirds business activity.

"Catalyzing" specific industries. Supporters welcome the idea of government selecting promising industries to nurture. Critics say it could politicize an investment process that's best done by the private sector.