Last week, the GOP-led Congress passed a new-millennium budget resolution that is remarkably similar to President Clinton's proposed budget in one unfortunate respect: Neither party is proposing to reverse the steady decline in public investment that is critical to continued improvements in national innovation, productivity and living standards.

It is widely accepted that American economic competitiveness in a global economy is dependent on technological innovation and a skilled workforce. Yet the United States could lose its status as the world's leading innovator nation during the next decade if current national spending priorities continue unchanged. Today's prosperity is the payback from decades of public investment that is not being adequately restocked for the future.

This is the conclusion of an alarming report released last month by the Council on Competitiveness, a private group of corporate CEOs, university presidents and labor leaders.

Innovative capacity and economic prosperity

The council's report features a comparative "innovation index" developed by Michael Porter, a Harvard business professor and economic development guru. It shows the United States at the top of the international heap in 1995 but projects a drop to sixth place by 2005 -- behind Japan and four northern European nations -- if our national commitment to invest in basic research, infrastructure, education and training continues to erode.

The council suggests that a nation's innovative capacity, or global competitive edge, results from the interplay between what it calls the "common innovation infrastructure" and the behavior of clusters of interconnected industries and firms. Whatever its own private capacities, to succeed, each critical industry (e.g., computers and telecommunications) must draw on the nation's common stock of basic research, human capital, academic institutions and physical infrastructure.

Unfortunately, the study concludes, America's common innovation infrastructure has been eroding since the preoccupation with the federal budget deficit began in the mid-1980s.

This decline is readily apparent in the historical tables attached to the president's proposed budget for fiscal year 2000. In 1998, total federal "investment" -- for physical infrastructure, research and development, education, and training -- fell to its lowest level in at least 40 years. Public investment has fallen steadily this decade to 14% of total federal spending and less than 3% of GDP -- less than half the level sustained during the economy's "golden age" of productivity growth during the 1950s and 1960s.

The council describes how virtually every major advance in information technology (IT), the building blocks of the "new economy," had its roots in government-funded scientific and technological research. Well-known examples include the Internet, computer networking, windows, parallel computing and, more recently, Web browsers.

While industry investment is increasing, private research and development is heavily concentrated on product development. Because product cycles are short, private companies rarely invest for a payoff that is more than 10 years out.

The problem is that federal spending on non-defense research and development has been shrinking at an average annual rate of 2.6% in constant dollars since 1987, according to the Progressive Policy Institute (PPI). If the federal government had maintained its 1980 share of basic research funding, an additional $100 billion would have been invested in 1998, according to National Science Foundation (NSF) estimates.

One result: the United States is now dead last among the industrialized nations with respect to the growth rate of total research and development investments.

America's human capital gap

A second pillar of national prosperity is our physical infrastructure -- everything from bridges and highways, to school buildings, mass transit and fiber optic cables. The Economic Policy Institute estimates that the federal share of what it calls the "public investment deficit" in physical infrastructure is between $16 billion and $26 billion. This does not even include the roughly $110 billion it would take to repair and upgrade the nation's public schools.

The third and perhaps most essential ingredient of national prosperity is the quality of the national labor force. A 1996 survey of chief executive officers at 428 high-growth companies concluded that an inability to hire sufficiently skilled and literate employees is the biggest impediment to national growth and productivity.

The demand for IT workers is already growing far faster than our home-grown supply. U.S. college degrees and graduate enrollments in computer science, physical sciences, mathematics and engineering have fallen steadily during the 1990s, according to NSF data.

Firms understandably are reluctant to offer expensive education and training to workers who might quit tomorrow and take their new skills to a competitor. Our society risks a modern-day "tragedy of the commons" unless the nation makes a quality education an affordable opportunity for all.

The graying of the budget

The long-term budget outlook is bleak. Federal investment outlays, adjusted for inflation, are projected to increase only 2% over the next four years. In Washington, the parties are framing the debate over the budget surplus as a choice between massive tax cuts (Republicans) and boosting baby-boomer retirement consumption (Democrats).

The lion's share of the expected budget surplus comes from payroll taxes that should be saved to pay the enormous future cost of baby-boomer Social Security and Medicare benefits. Clinton, Federal Reserve Board Chairman Alan Greenspan and others want to wall this off by paying down the national debt, which has the benefit of adding to national savings and reducing federal interest payments.

The bigger battle concerns the future "on-budget" surplus, which is the far smaller flow of surplus revenue expected from the income tax and other sources if the economy stays on track. The GOP's proposed budget would freeze non-defense spending for a decade to pay for an $800 billion tax cut.

Clinton, meanwhile, would earmark most of it for shoring up Medicare and funding a new universal retirement savings account as a supplement to Social Security. The war in Kosovo also requires an emergency appropriation and will strengthen the Pentagon's push for more military spending.

The challenge to U.S. leadership

It is time for private-sector leaders to push the case that public investment is as essential to future economic growth as private investment. One option is a bipartisan agreement to dedicate an extra 10% of the overall budget surplus every year to boost public investment. Most of this could come from the Social Security trust funds, with the rest reducing the size of any future tax cut.

So long as these are true investments -- and not disguised spending on current consumption -- then the returns to society certainly would be higher than the 5.5% yield on Treasury bonds credited to Social Security.

Indeed, if boosting investments in innovation near the 1960s level can raise the average long-term rate of productivity growth by 0.5%, PPI technology expert Robert Atkinson estimates that the resulting growth in real wages would make Social Security and Medicare solvent again without cutting benefits or increasing taxes. The average family would similarly benefit far more from faster income growth than from a short-term tax cut.