The Growth Solution: The United States Has Moved beyond Its Era of 'Big Firm Capitalism' into an Era of 'Entrepreneurial Capitalism,' Posing Challenges and Opportunities. Economists Carl Schramm and Robert E. Litan Outline a Pro-Growth Agenda That Reflects America's New Economic Realities

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Huge domestic challenges confront our next presidents (none of which is fully resolvable by a single president): ensuring greater access to and affordability of healthcare, addressing our looming entitlements crisis, making significant headway against poverty, and restraining man-made climate change.

By the policies they champion, our future presidents can have an important impact on how rapidly our economy grows. Continued growth in per capita incomes, generated through ongoing improvements in productivity, is what drives improvements in living standards. Faster growth also will give us more resources to address each of our major domestic and foreign policy challenges.

Of course, government does not generate growth. But the private sector's success, and thus the pace at which the economy advances, depends heavily on the rules, incentives, and basic infrastructure that government sets and provides.

None of our long-run challenges or the opportunities afforded by faster growth will be achieved in the future without continued innovation--new products, services, technologies, and ways of doing things. Indeed, given the challenges ahead, we submit that in each case radical innovation is called for.

A quick look back through American history reveals that many of the most important radical innovations in the past--the telegraph, telephone, radio, television, automobiles, airplanes, computers and the software that operates them, and many of our current Internet-based successes (Google, Amazon, eBay)--have been introduced and commercialized first by entrepreneurs. What all of us, regardless of our political affiliation, should want in our next presidents and in our other governmental officials, therefore, is an understanding of the need to promote policies that will best foster the entrepreneurial spirit that drives radical innovation.

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We begin with the goal of rapid growth because it is so central to realizing all of the other objectives. It also has long had bipartisan support. For Republicans, of course, growth has been a central goal for some time. In 1980, President Reagan famously helped usher in the so-called "supply-side" revolution, which was all about increasing the economy's long-term potential growth rate. What many Democrats today may forget is that two decades before, when John F. Kennedy ran for president in 1960, the Democratic platform also had its own, quite specific supply-side objective (although it was not labeled as such then). The 1960 platform urged policies that would enable the economy to grow at about 5 percent a year, more than a percentage point faster than the previous decade, and a growth rate not attained on a sustained basis any time since.

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Indeed, for two decades after the 1973-1974 oil shock, the economy grew at only 2.5 percent, or half the target set by the 1960 Democrats. From 1994 to 2000, annual growth jumped to 4 percent. Even after the 2000-2001 recession, and until the downturn this year, the economy still grew at roughly a 3 percent annum rate.

What happened? The conventional wisdom is that, beginning in the mid-1990s, growth surged because of the information technology (IT) revolution. Productivity advanced rapidly in the manufacture of computer chips, the heart and soul not only of computers but also of an increasingly wide array of products (such as TVs, appliances, cars, and airplanes). In addition, the diffusion of computers, easy-to-use software, and the Internet goosed productivity at organizations throughout the economy.

The conventional wisdom is right, but also incomplete. Think for a moment about which firms made all this IT so easy to use. The answers that immediately come to mind are companies like Microsoft, Apple, Sun Microsystems, Intel, Oracle, and Google, firms that did not exist or were in their infancy as recently as 30 years ago. …