May 08, 2013

The War on the Future

Patrick Marren
Partner

There is a war between the left and right
A war between the black and white
A war between the odd and the even.
Why don't you come on back to the war?

- Leonard Cohen, "There Is a War"

Our society is divided right now. Everyone says it is. It's the right versus the left, and as the saying goes, "There's nothing in the middle but yellow lines and dead armadilloes."

But I'd like to introduce a hypothesis which I increasingly suspect is all too true: there's much more unity, effectively, when it comes to another conflict: the war on the future.

Think about how a society, a company, an economy, a household invests in the future.

  • Feeding and housing of children.
  • Education of the next generation.
  • Infrastructure investment.
  • Basic research, to provide a foundation for technological progress and leadership.
  • Business investment aimed at ensuring long-term market survival and prosperity.
  • Investment in defense and security technology and prevention and deterrence of potential threats.

By these measures, we Americans are not investing nearly enough in things designed to create a better (or even a livable) future:

  • Poverty in the United States is often thought to be skewed by ethnic group, and this is undoubtedly true. But where it is really skewed is by age: the youngest Americans are far worse off than older Americans. Of the 35 most developed nations, according to a study by UNICEF, the United States ranks 34th in terms of child poverty, with 23% of its kids falling below the poverty line. This phenomenon seems to be getting markedly worse: according to another study, by the Foundation for Child Development, the percentage of children living in a household that fell below the poverty line increased from 15.6% in 2001 to 21.4% in 2011. 
  • At the same time, investment in education has taken some major hits. States are spending 28% less per student on higher education (colleges and universities) in 2013 than they did in 2008, when the recession hit. In 35 states, state funding per student in secondary and elementary education is lower than it was in 2008 - in some cases more than 20% lower.
  • U.S. physical infrastructure is in very bad shape, according to the American Society of Civil Engineers (an interested party, to be sure, but the numbers seem to bear them out). Their annual report card gives U.S. infrastructure a D+ grade. In no area did the grade rise higher than a B- (for Solid Waste); Bridges and Rail both fared slightly worse at C+; Inland Waterways and Levees fared worst, both at D- levels. Physical capital outlays for infrastructure have declined since the late 1960s from about 3.3% of GDP to about 0.7% in the late 1990s, before ending up at 1.2% in 2010 due to the American Reinvestment and Recovery Act (a.k.a. "the stimulus"), according to the Office of Management and Budget of the White House. Another study by the Congressional Budget Office showed the decline to be less, but still dramatic, from a high of 3.1% of GDP in the early 1960s to 2.4% in 2007. 
  • Basic research is falling off in real terms in the United States, just as it is zooming upward in Asia. The United States is still the biggest spender on basic R&D in the world, accounting for 31% of basic R&D spending in 2009. But recent U.S. federal budgets have begun to skimp on R&D investments, not keeping up with inflation in total. The National Institutes for Health buys 18% less research than it did in 2004; by this year, it is estimated to have lost 41% of its public funding in a single decade. Lest someone think that the private sector is making up the difference, private venture investment in "select science and technology industries" fell from $43 billion in 2000 to $10 billion in 2010. According to the same source, a National Science Foundation report, "Private equity investments in certain S&T industries plummeted from nearly $60 billion in 2007 to less than $10 billion in 2008, but it has rebounded somewhat since then, reaching about $15 billion in 2010." Further, while industry investment in R&D outpaces total federal investment in R&D, just 3.8% of private R&D is spent on basic research; the remainder is spent on applied research, the stuff with a closer-in payoff. Aerospace appears to be one of the few areas of high technology in which the United States has run a significant trade surplus; the federal government clearly has been a prime mover behind this entire industry from the beginning. The Boeing 707 was the civilian version of the KC-135 refueling tanker, developed for the Department of Defense; it was the basis of the entire modern jet air travel industry not only in the U.S. but worldwide. The entire computer revolution, Apple, Microsoft, the Internet, etc., can trace its roots in significant ways to federally funded research that helped put 12 Americans on the moon, as well as other defense-related efforts. There is almost literally not a single great American achievement in technology that was not accomplished with large dollops of U.S. federal government investment or direct research. That federal government investment is waning; meanwhile Asian investment in R&D is rising dramatically, in China by about 22% per year.
  • CEOs of publicly traded companies are increasingly loath to make investments in long-term survival and prosperity that could cause them to miss their next quarter's earnings targets. Wall Street strikes harshly at stock prices of companies that dare to disappoint, and boards of directors stand ready to punish managers who want to put long-term survivability ahead of short-term profitability. Cheng, Subramanyam and Zhang of Arizona, USC and Columbia respectively found that companies that issued invesment guidance more often were statistically more likely to invest less in research and development; that they were more likely to hit their short-term earnings targets (though they carefully low-balled their estimates to do so); and they also had lower long-run proifitability than companies that issued guidance less often. Surveys have shown that CEOs want to make decisions that will guarantee that their company will be profitable in the long term, but they will not do so if it would mean missing their short-term earnings targets. This makes some sense from a strictly financial standpoint: time is money, after all, and investors prefer more money sooner over more money later. But it contributes to what Alfred Rappaport calls "the disease of 'short-termism.'" 
  • Sequestration has enforced across-the-board, strategically non-targeted cuts on the federal budget, striking the military particularly hard. Every program in the military is cut by the same amount. "[E]very single program, project and activity - every line-item in the Pentagon budget, from the biggest weapons system to the smallest spare part - has to be cut by that same 9%," according to Slate magazine. Future-oriented programs such as R&D are projected to be cut 9.1% or $7.1 billion each year. In the meantime China's military spending is estimated to have risen by some 11.2% in 2012, with particular emphasis on R&D; total military spending by China has risen by some 500% in real terms since 1997. Its R&D budget is estimated to have risen at double that rate over the same period, by some 1000%. While the US is slashing its future-oriented defense investment, China seems to be continuing to redouble its own investment in future systems. This is quite critical at a time when warfare seems on the cusp of a phase-change into something quite unrecognizable, as cyber warfare and increasingly tiny, individually targeted, cheap and invisible drones make war into something almost unrecognizable to people used to huge carrier battle groups, nuclear missiles, and huge bomber squadrons. 

Each and every American politician insists that he or she is concerned about the future, and her or his opponents are devoted to destroying the future prospects of the nation. Yet the sequester, to take just one example, was made by both parties. The historically huge budget deficits that we have seen since 2002 can certainly not be laid at the feet of just one party. Republicans claim that Democrats are not serious about tackling long-term budget shortfalls. Democrats respond that Republicans' ideas on Medicare and Social Security and Medicaid all seem to boil down in the end to gutting the programs to "save" them - an echo of the American officer who told a reporter in Vietnam who asked why his unit was torching a village, "We're destroying the village in order to save it." 

Now, many of these steal-from-the-future decisions arise from the current recession and budget situation, which will always favor present exigencies over future speculative benefits. And our allegedly dire future budget conundrum does not really result from either overspending or undertaxing - it's mostly a demographic accident, the coming slump in the population of working-age adults versus retirees (and children). And to top it all off, the Constitution actually forbids Congress from appropriating money beyond  two years for military purposes (Article I, Section 8, Paragraph 12). 

Yet the trend is obvious. In every area the might be said to be critical for the future, we seem to be skimping on investment - or even on thinking.  

There are a few forward-thinking organizations that still invest in anticipating the future. Some of them are our clients. A recent article about government efforts to look ahead cited our work with FEMA's Strategic Foresight Initiative in 2011 and our work since 1998 with the U.S. Coast Guard (the Evergreen process), as the inspiration for the Department of Homeland Security to look ahead to future challenges:

"For FEMA's Strategic Foresight Initiative (2011), DHS futurists flashed-forward to 2026 to help emergency managers understand how their role would be redefined by changes in climate, technology, and society. Every four years, the U.S. Coast Guard conducts its Evergreen process. The Defense Department, through DARPA, routinely looks far into the future. [Our] researchers pored over similar studies from government, academia, responder groups, and industry. It was time well spent. 'We used Evergreen as a model for mapping scenarios against potential capabilities,' says [DHS Deputy Director Bob] Tuohy."

We're proud to be part of the inspiration for innovators throughout the government and private sector.

But as American citizens... it would be nice to have a little more company.

(For more on the results of our past work on Evergreen for the U.S. Coast Guard, hit this link. For more on FEMA's Strategic Foresight Initiative, look here.)

Thoughts?