The great American innovation engine is firing again

THERE is a view, pungently expressed by the venture capital investor Bill Gurley, that Silicon Valley has thrived because it is 2,850 miles west of the centre of federal government. “The reason that Silicon Valley has been so successful is because it is so fucking far away from Washington DC,” Gurley told a cheering audience last year.

But that view ignores a significant historical inconvenience: Silicon Valley was mostly built with federal dollars. The Pentagon and Nasa were the first, and voracious, purchasers of silicon chips to guide their military and civilian rockets. By 1963, the Apollo space programme was buying 60 per cent of all the integrated circuits produced in the US.

Once again, the US federal government is back in the game of funding technology in a big way, promising to unleash a further wave of private sector investment and innovation.

The US has both the intent and the capability to reassert global technological leadership, while hobbling China’s rise. And Silicon Valley is likely to be among the biggest beneficiaries of that political ambition, even if some of its leading luminaries do not yet appreciate it. The rest of the world might have fondly hoped it would one day overtake the US in several strategic sectors, but other nations look more like the yapping dog failing to catch the car.

Last week, the Semiconductor Industry Association published a report highlighting how the adoption of the Chips Act in 2022, which provided $39bn of grant incentives to support the semiconductor industry, had primed a torrent of private sector investment. An additional $447bn of investment has since been announced in 83 separate projects across 25 states. The report forecasts that the US will now increase its share of global manufacturing capacity for leading edge chips (below 10 nanometres) to 28 per cent of the total by 2032 from 0 per cent today.

Just as the Sputnik moment of 1957, after the Soviet Union’s launch of the first satellite, triggered a surge of technological investment in the US, so the current superpower rivalry with China has similarly loosened federal spending in the tech sector. Washington finally realised that its reliance on chip imports from Taiwan and South Korea was an unacceptable strategic vulnerability in a more volatile world.

“The idea that 75 to 85 per cent of our chips were being made in east Asia was unsustainable,” John Neuffer, the president of the Semiconductor Industry Association, tells me. “We are spreading the peanut butter more broadly.”

However, the federal government’s ambitions extend beyond semiconductors. The Inflation Reduction Act, also passed in 2022, is stimulating a significant wave of investment in climate tech. And the Biden administration aims to bolster US strengths in the biotech and quantum sectors, too. It recognises that the US has previously failed to capitalise on its early technological lead in some critical areas — telecommunications infrastructure equipment and batteries, for example — and does not want to repeat that mistake.

There is, of course, only so much that Washington can do. But the US private tech sector is independently enjoying a surge of new funding as investors bet big on the transformative power of artificial intelligence. US companies, led by Google, OpenAI, Nvidia, Microsoft and Anthropic, already dominate the field of generative AI. Goldman Sachs estimates that AI-related investment could rise to between 2.5 per cent and 4 per cent of GDP in the US, compared with 1.5 per cent to 2.5 per cent in other leading economies.

“This is a genuine breakthrough,” says Erik Brynjolffson, director of the digital economy lab at Stanford University.

Not only will generative AI sharpen the competitiveness of US companies, it will boost the overall economy, too. While the Congressional Budget Office is forecasting average annual productivity growth of 1.4 per cent over the next decade, Brynjolffson predicts it will be closer to 3 per cent, mostly thanks to AI. “It will roughly double the rate of productivity growth,” he tells me.

It is doubtless true that economies running a budget deficit of 6 per cent of GDP and enjoying an AI-hyped stock market boom can look deceptively good — at least for a while. America’s weaknesses, including threadbare transport infrastructure and skills shortages, will not be easily overcome. US restrictions on high-end chip exports to China will hurt US companies too. And political turmoil following this year’s presidential elec0tions cannot be ruled out. But as the legendary investor Warren Buffett preaches: “Never bet against America.”