Jump-Starting Europe
Copyright Council of Europe
Europeans are scrambling to adjust after the United States by all accounts withdrew the security guarantee it had provided since World War II. Well before then, Europe was already facing headwinds, with slow growth and deindustrialization amidst a lurch to the right. Mario Draghi produced a now-famous report and on February 18, 2025 addressed the European Parliament, insisting that “we must be optimistic” and urging policymakers to “do something.”
The ”do something” part has been a challenge for a European Union that never quite achieved the Single Market and in important ways continues to operate as 27 individual Member States. In Germany, the new government is charting an aggressive change of course, looking to shed the “debt brake” in order to finance up to a trillion dollars in spending on military and and non-military investment.
There is a debate over whether the money should only be spent on non-military investment. But one of the critical lessons we can draw from a 2019 book by Simon Johnson – now a Nobel Laureate – and fellow MIT professor Jonathan Gruber is that military investments can spur innovation and investment that also have great benefits for the public sector more broadly. We don't have to see it as an either/or proposition. The book, Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream, traces the urgent American ramp up of production during World War II – further tracing the spillover benefits from those investments and the creation of a broader federal investment infrastructure. These investments ultimately drove American economic success in what would become known as the American Century.
The book also points out that the United States has strayed from that path for decades now, and the authors outline an agenda to get back on track.
“June 1940 represented a moment of deep crisis for the world – and one to which, eventually, the United States responded dramatically,” they write. Today, democracies face another deep crisis. Herein lies the opportunity for Europe: the chance to make investments now that can generate prosperity for Europeans – and European democracy -- for generations to come.
Winning World War II
In 1939, U.S. military production was anemic - as an example, Johnson & Gruber note that the United States made a total of six medium tanks that year. Military technology was in no better shape. Yet by 1944, the United States wielded the arsenal of democracy that helped the Allies defeat the Axis Powers.
How?
The answer is complex, but the tl;dr version is this. The United States ramped up spending on scientific research – by a factor of seven. In addition, pursuant to the leadership of Vannevar Bush, an academic who formed and chaired the National Defense Research Committee, “scientists . . . had figured out how to apply the existing stock of knowledge for military purposes and . . . American industry proved very good at turning those ideas quickly into a large number of physical goods . . . .” The strengths of the government (money for basic research and development as part of a longer-term planning horizon) – married the strengths of the private sector (commercialization and production). A one-two punch.
Winning the Peace
Vannevar Bush took lessons learned from the success in ramping up innovation during World War II and set his sights on sustaining the momentum after the war ended. He believed the federal government should maintain its commitment to research and development to improve quality of life for humankind.
The Soviet launch of Sputnik proved to be another impetus for action. It led the United States to create the Defense Advanced Research Projects Agency (DARPA). DARPA was in some sense an extension of the military innovation model during and after World War II.
From 1940 to 1964, federal funding for R&D increased by a factor of 20, ultimately reaching 2 percent of annual GDP. The result?
Scaling and distribution of penicillin
Streptomycin to cure tuberculosis, along with other antibiotics
Cortisone and other steroids
Digital computers, including hardware and software
Jet aircraft
Satellites
The Internet
The partnership among the federal government, universities, and the private sector created well-paid jobs that contributed to the expansion of the middle class, as Americans saw the doubling of median family income between 1947 and 1970. Not only did incomes rise, but the gap between rich and poor narrowed.
It was the Golden Age of Capitalism.
What Went Wrong
In the1960s, U.S. federal government spending on R&D was 2% of GDP. By 2019, it was around .7%. We are watching as even now the federal government and American universities are being further starved of resources.
The authors note the rise of the anti-tax movement in the 1980s as one of the reasons the government’s fiscal commitment to R&D declined. While under the Reagan Administration funding remained for military R&D, non-military R&D fell.
“Do something.”
Private R&D does not make up the difference. While some examples of private innovation are well-known – Thomas Edison, for example – in many cases, breakthroughs in innovation come from government-funded R&D. The private sector is even less inclined than it used to be to fund basic research.
Having cited the growth in the American standard of living from 1947 to 1973, the authors note the failure to sustain it thereafter. Improved productivity is a driver of an increased standard of living, and that increased productivity depends on education, research, and development. They write that “economic growth has become divorced from job creation.” Family incomes are growing by less than the increase in GDP, and the gap between rich and poor is growing instead of shrinking.
The authors also recognize severe regional inequalities. It turns out Vannevar Bush was a bit of an elitist and did not support efforts to ensure that federal money was used intentionally to spur economic development throughout the country. Today, the United States has profound geographical disparity, particularly as between certain coastal cities and the rest of the country. As manufacturing in the American industrial heartland shrank, geographical disparities grew.
To bring discipline to the deployment of federal research dollars as a tool to redress geographical inequality, the authors devised a methodology to identify locations in the United States that would deliver bang for the research buck. They chart specific locations, including in Pennsylvania, Michigan, Wisconsin, Kentucky, Georgia, Arizona, North Carolina, Alabama, Mississippi, Iowa, Idaho, Kansas, Nebraska…. The list goes on.
Now, to be sure, one of the components of the index is quality of life, based on house prices, commuting time, and violent crime rates. To the extent that states are enacting laws and policies that impinge on civil liberties, it may prove more difficult today to attract people to those places. Nevertheless, the concept – that we can figure out how to use public investment to advance innovation while also addressing regional inequality – that is a blueprint for rebuilding democracy.
Europe’s Opportunity
Jump-Starting America was (and may again be) a pathway for the United States to recapture its tradition of public funding of research and development to drive innovation and shared prosperity. But we aren’t doing it now.
Herein lies opportunity for Europe. Amidst all the tumult, as Europe confronts its own concerns over deindustrialization, it’s easy to forget that European countries are in fact in a solid position to capitalize on the American lapse. As Sander Tordoir of the Center for European Reform explains, "Europe collectively outproduces the United States in steel, vehicles, ships, and civil aircraft. European Union member countries, on average, also pay less to service their debts than the United States."
In case there's any doubt, the spillovers from public spending to the private sector are not limited to the American experience. Johnson & Gruber cite a study of OECD countries showing that public spending crowds in private-sector spending for them too.
For those concerned about ensuring that innovation and investments are compatible with the green economy, it is worth noting that this provision is part of the Defense Production Act, a statute originally enacted in 1950 that fell into a bit of obscurity until the pandemic:
to further assure the adequate maintenance of the domestic industrial base, to the maximum extent possible, domestic energy supplies should be augmented through reliance on renewable energy sources (including solar, geothermal, wind, and biomass sources), more efficient energy storage and distribution technologies, and energy conservation measures.
The Biden Administration sought to work with Europe to deploy national security tariffs on steel and aluminum to incentivize clean production while shielding democracies from non-market policies and practices that put those industries at risk.
We do not need to see defense investment as somehow at odds with other investment priorities, including greening the economy itself.
“We must be optimistic.”
The European stock market is outperforming the American stock market of late. Our loss seems to be Europe’s gain.
As has been the case in the United States, Europe has regional disparities and areas where lack of opportunity is associated with a rise in extremism. Jump-Starting America makes the case for public investment designed to ensure that prosperity is shared not only across classes, but across regions.
The legal and fiscal architecture of the EU is complicated, and it’s important not to ignore the structural challenges of mounting a campaign of this magnitude. We also must take to heart critical lessons about the dangers of the military-industrial complex. But in his remarks to Parliament, Draghi pointed out that we can’t just say no to everything. At some point we have to say yes to something.
A lot of things seemed impossible in America in 1940. What the United States did in response spurred an era of widely shared prosperity unmatched in human history.
That is a reason to be optimistic – and to do something.
March 10, 2025