Killing the Golden Goose

Over the last few decades, the US economy has consistently grown faster than the EU economy. One key reason, as highlighted by the 2024 Draghi report on EU competitiveness, is America’s greater productivity growth.  As the Economist noted in 2024, “output per person is now about 30 % higher [in the United States] than in western Europe,” a gap that has roughly doubled since 1990. 

There are many reasons for America’s superior productivity growth. But one that both US and European leaders often focus on is the relative US and European capacity for innovation. The idea is that investments in research and development (R&D) and the ability to foster the development of startups working on the frontiers of technology are key determinants of productivity growth. The dominance of the US technology sector relative to the European seems to demonstrate the US has a better system for fostering and financing the innovative companies that lie at the heart of the US growth model. In this way, the US innovation system has become the golden goose of the US economy, continually producing golden eggs in the form of new technologies and new companies to that can profit from them.

The question for the moment, therefore, is what will Donald Trump’s re-election mean for an innovation system that is already the envy of the world? 

On the broad macro-economic level, Trump’s proposed economic policies have the potential to boost US economic growth and innovation. The new Trump administration has put a priority, at least rhetorically, on deregulation and lower taxes to promote economic growth. Since the November 2024 election the US stock market has responded positively to the prospect of Trump administration economic policies. The technology sector in particular has seen strong growth in its share prices. The Trump administration has further promised to mobilise a further $500 billion in investment in artificial intelligence infrastructure. US venture capitalist firms have become more bullish as a result, heralding another decade of strong US investment in innovation.  

US green technology firms have seen a consequent decline in their stock prices, implying they will have less capacity to sustain cutting-edge research. These developments could further cement China’s global domination of the green technology sector.  To the extent that climate change means green technologies are critical for future productivity growth, this could threaten US technological advantages even as the US invests in other high-technology sectors.

Finally, potential cuts in US federal spending for research and development could also weigh on the US innovation system. To an extent that Republican administrations rarely acknowledge, government seed funding of basic research in industries like pharmaceuticals and of specific technologies through such bodies as the Defense Advanced Research Projects Agency (DARPA) have strongly supported the US innovation system over the last several decades. Government funding, for example, provided the early funding for the Internet and mRNA vaccines. Nonetheless, in its first days, the Trump administration has embarked on a broad-based campaign to increase government efficiency and limit government spending, all across the federal budget. The effort seems based on the principle that the system of federal spending has become so complex and so effective at hiding its inefficiencies in bureaucratic processes that the system must be destroyed in order to be reformed. Hence, the new administration has sought broad funding freezes, without much regard to their effect on the innovation system. These freezes have already weighed on various government efforts to fund basic research through such government bodies as the National Institutes for Health and the National Science Foundation.
 

It is possible that none of these risks will materialize, or that if they do that, they will not materially affect the US capacity for innovation. The safest prediction is always that prior trends will persist.  The US innovation system has long survived and prospered despite myriad prophesies of doom and even more ill-advised government policies. It even made it through a previous Trump administration. Wiser heads within the administration may yet prevail and convince Trump to carve out an exception for high-skilled immigration. Maybe green technology will not dominate the future and perhaps the courts will limit the Trump’s slash-and-burn campaign against federal spending. Given the record of the last few decades, it seems foolish to bet against the US economy and the US capacity for constant innovation.

But the second Trump administration heralds the ascendancy of fools. The administration has announced its attention to directly attack the some of the core sources of American economic strength and innovation: immigration, government administrative capacity, and public funding of research and development. The Trump administration has gathered an unprecedented level of power within the executive branch and put people in charge who seem to either not understand the sources of American innovation or to not care. Killing the golden goose of the US innovation system will require persistent and even willfully bad policy, but the second Trump administration seems like it might be up to the task.